23 liquidity measures and management

MEMORISE THIS FOR EFFICIENCY

CCC = DIO + DSO - DPO
Suppliers offer payment terms in the form a/b net c, which means a percentage discount of a if the invoice is paid within b days, otherwise full payment is due within c days.

The cash conversion cycle (CCC) measures the time it takes for a company to convert its investments in inventory and other resources into cash inflows from sales.

HAMMER THIS INTO YOUR HEAD

CCC = DIO + DSO - DPO

Lower CCC is better and can be artificially created
Delay paying suppliers right before quarter-end ⟶ payables look high ⟶ CCC ↓
Sell receivables to a bank (factoring) just before reporting ⟶ receivables drop ⟶ CCC ↓
Ship inventory early to distributors with return rights ⟶ inventory disappears on paper ⟶ CCC ↓
Avoid writing down old inventory ⟶ inventory looks lower than reality ⟶ CCC ↓
Stop buying inventory just before reporting ⟶ inventory temporarily low ⟶ CCC ↓
We can think of accounts payable as an implicit source of credit from suppliers (as opposed to explicit sources such as bank loans). Suppliers offer payment terms in the form a/b net c, which means a percentage discount of a if the invoice is paid within b days, otherwise full payment is due within c days. Forgoing the discount for prompt payment amounts to borrowing money from the supplier for (c – b) days.

Match costs with revenues: recognize COGS and estimated warranty costs in the period of sale, not when paid in reality.
Remember US GAAP loves 'CFO'. Interest Expense go into operating always. IFRS gives you a choice. You can put Interest in 'CFF' or in 'CFO'.
IFRS is cool with splitting R&D. Research (incl. early software work) expensed; development (incl. saleable & internal software) capitalized if criteria met.
GAAP is strict, BOTH research and development is expensed. No capitalization at all.
GAAP hates R&D—except software. Saleable software = capitalize (like IFRS); internal software = capitalize only after build starts.

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