It may seem obvious, but too many would-be growth companies don’t have the cash they need. Cash is the oxygen to a company and knowing your cash conversion cycle and then improving it is vital. Your Cash Conversion Cycle (CCC) is a key performance indicator. Do you know how long it takes from when you spend a dollar, until you get that dollar back?
What Is Your Cash Conversion Cycle?
The Cash Conversion Cycle is a measure of how long your money is locked up in production before turning into cash. It measures how long it takes a business to pay for and generate cash from the sales of its inventory.
Your cash will take the following journey through the Cash Conversion Cycle; first, it’s converted into inventory and accounts payable (AP) via sales and accounts receivable (AR), and then back into cash. The number of days it takes your cash to go through this cycle is the Cash Conversion Cycle. As a rule, the lower this number is, the better for the company.
Changes in your Cash Conversion Cycle can be very telling – if a business takes an extended period of time to collect outstanding accounts, or they overproduce due to poor estimations or management, its cash conversion cycles lengthen.
10 Ways To Reduce Your Cash Conversion Cycle
Verne Harnish, Gazelles founder, The Growth Guy and author of Scaling Up 2.0: Mastering the Rockefeller Habits has identified 10 areas of opportunity to reduce your cash cycle and work towards doubling your cash position within 12 months.
- First, stop saying, “Well, this is just the way it is in our industry.”
- Have your available cash reported DAILY with a short explanation of why it changed in the last 24 hours – and chart against your weekly AR and AP. You’ll learn so much more about your business when you see how the cash is owing on a daily basis.
- If you want to be paid sooner, ask. Small firms are finding that large businesses (and government organisations) will pay considerably faster or even prepay if you simply ask, ask, ask and ask some more.
- Give value back for clients that pay in advance or on time.
- Get your bills out quicker – hire another person in accounting to do nothing but make sure invoices are timely and followed-up.
- Understand why your clients are paying later – many times there are recurring mistakes on the invoice or the invoice is not structured to make it easy for the customer to reconcile. Fix this.
- Understand your customers’ payment cycles and time your billings to coincide.
- Shorten product and service delivery cycle times. All of you have some kind of “work-in-progress.” The quicker you complete projects, the quicker you get paid.
- Have such a valuable product or service that you have some leverage with your customers to pay sooner.
- Of course, improving margins and profit improves cash.
As an internationally certified Gazelles business and executive growth consultant Leigh works with businesses serious about growth. As director of Scalable Sustainable Business Growth, he brings proven tools, world-class intellectual property, and time-tested growth concepts to reduce your business pains.