Contents
- Overview
- Calculator
- Example: Keurig Dr Pepper
- Formulas
- Industry Averages
- Notes
Overview
Any business owner considering a financial institutions Treasury Service (TS) products is interested in the quantitative metrics on their bottomline. In this article I provide an easy plug-and-play calculator to determine the bottomline impact on free cash flow by changing TS components, specific to your financial situation.
Definition 1: TS is how an entity or individual receives capital, maintains it, and spends it.
Definition 2: The Cash Conversion Cycle (CCC) is the end-to-end cash flow through those three stages.
There are many ways TS products can impact the bottomline, but all will impact one of the three CCC components: Days Sales Outstanding (DSP), Days Inventory Outstanding (DIO), Days Payable Outstanding (DPO).
Definition 3: CCC = DSO + DIO – DPO
Receiving your cash faster, and holding it on for a longer time is usually ideal for your business, therefore a shorter CCC is beneficial. That is achieved by a shorter DSO/DIO and a longer DPO.
Calculator
Feel free to download my calculator from Google Sheets here.
Example – Keurig Dr Pepper
As an example, below is an analysis of Keurig Dr Pepper’s (KDP) free cash flow impact if we modify the CCC components.
By shortening the DSO by 1 day from 34 to 33, KDP can free up roughly $18 million in annual free cash flow. Inversely, by changing the DPO by 3 days, the impact is in the $22 million range.
These numbers are determined by changing the CCC components and summing up the results from the formulas below.
Formulas
Change in Accounts Receivables/Payables and Inventory per Change in Day(s)
Industry Averages
Notes
- This is a very simplified example and a more realistic situation would require additional analysis of credit, points, various ratios of product mix, supplier contracts, relationships and timing, just to name a few.
- Numbers are based on public records of Keurig Dr Pepper 2016
- Some numbers are rounded/estimated due to discrepancies in public records or time required to determine a more accurate number within a similar range
- Credit for formulas goes to a public article by the American Chartered Bank (ACB)
- Everything here was created during my free time and free public resources (i.e. yahoo finance, google, ACB, etc…)