Fundamentals of Business

The following examples illustrate differences in conversion cycles...

The following examples illustrate differences in conversion cycles between B2B and B2C, Service and Product:

A pure service business holds stocks only for consumption and not for resale. B2C is cash only; say a window cleaner will be paid in cash once the job is done, more likely to be an enterprise's petty cash expenditures.

B2B is normally on credit terms.
Most is done through tendering as there are more service providers and hence competition. Service recipients are service provider's debtors. A short cash conversion cycle indicates good working capital management. Conversely, a long cash conversion cycle suggests that capital is tied up while the business waits for customers to pay. It is possible for a business to have a negative cash conversion cycle, i.e. receiving customer payments before having to pay suppliers.

Examples
Companies that employ Just In Time (zero stock) practices such as Toyota, Dell, and companies that buys on extended credit terms and sells for cash, such as super-markets. The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it may reduce the amount of cash it needs. In other words, accounts payable reduce net working capital.

Why is cash flow important?
Managers/Owners use cash generated from sales to settle their liabilities, that is paying creditors, staff wages, utilities, rates e.t.c.