You don’t have to go back a long, long time ago to a galaxy far, far away to understand that Star Wars has transcended the screen and become a staple of pop culture across the globe, spawning countless toys, novels, shows, and Pez dispensers. Growing up as a fan of the franchise, I learned plenty from the struggles of the noble Jedi against the evil Sith and realized that compared to the Skywalker clan, my family’s problems were pretty petty. It wasn’t until I entered the realm of finance that I realized that from a certain point of view, Star Wars can even teach you a bit about having the right kind of capital for your small business.
I vividly remember May 19, 2005. It was the very last time that I thought I would ever be in line for the premier of a new Star Wars film. That day Revenge of the Sith hit theatres, packing a galactic punch and left a significant mark on the film industry with its $848.8 million box office run. This was a huge success considering the film only had a $113 million budget, earning almost eight-fold what it cost to produce. Any product selling that well would be too good to lay to rest. Alas, creator George Lucas made it clear Star Wars was done and only six films would ever be made.
And he was right. For a while. Then a modest four billion dollar offer for his empire reached George’s ears, and it made him start to reconsider. “It’s now time for me to pass Star Wars on to a new generation of filmmakers,” said Lucas in 2012, after the sale of the franchise to the media conglomerate Disney was announced. Suddenly, there was more story to tell, and frankly I don’t blame him, I think even Shakespeare would bring back Romeo and Juliet for three more plays if it meant more shillings than he could ever count.
Now with the superb success of The Force Awakens we can easily look back at Disney’s decision and know that it was a winner. But even for Disney, $4 billion is an awful lot of money to spend on something that won’t start to be profitable for several years. This was a huge risk that would certainly pay off, at the expense of an extremely slow cash conversion cycle (CCC).
What the cash conversion cycle you ask? Simply put, it’s a metric that expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. As of March 2016, The Force Awakens has pulled in over $2 billion worldwide. This figure is not even including toy and merchandising sales which will undoubtedly add millions to that number. On that note, Disney may have gotten a little out of hand with that merchandising too, as I recently came across a bag of Star Wars oranges, and a case of Star Wars water. Yes, that’s true, I didn’t make it up, I guess when you spend four billion dollars you have to make it up somewhere.
Strictly sticking to the acquisition of Star Wars, Disney still is waiting for one CCC to complete, but with at least four more films set to be released and numerous Star Wars additions to Disneyland, it is a pretty safe bet that they will hit their mark, it is now only a matter of when.
Now let’s say you own a company that sells Star Wars shirts and not Star Wars films. In this case, you’ll have a set cost to get your inventory, and it will take some amount of time to sell all of your awesome shirts to deplete your inventory and complete your cash conversion cycle. Some businesses and industries have cycles slower than Jabba the Hutt, and some have cycles as fast as the Millennium Falcon.