Shorten Your Cash Cycle, Boost Cash 💵 📈

Happy Sunday to you!

I was asked to cover the Cash Conversion Cycle (CCC) recently so here we are! 😀

Earlier this week, I released a special edition of the Cash Flow Chronicles newsletter highlighting an amazing Tax professional local to my area. If you missed out on that here’s a link to check out how On My Way to CPA can help you and your team.

The cash conversion cycle (CCC) is a critical metric for understanding how effectively your business converts investments in inventory and other resources into actual cash flow. In simpler terms, it measures the time it takes for cash to flow back into your business after being used to purchase inventory or services. A shorter CCC means your business has cash on hand more quickly to reinvest, pay bills, or seize new opportunities.

It’s another reason I talk so much about Receivables. This area of many businesses gets overlooked, put on a back burner, etc. and really shouldn’t if you want to improve your CCC timing.

The CCC is made up of three components:

1. Days Inventory Outstanding (DIO): How long inventory sits before being sold.

    

   DIO=(Average Inventory / Cost of Goods Sold (COGS)​)×365

2. Days Sales Outstanding (DSO): The average time it takes to collect payment after a sale.

   DSO=(Accounts Receivable / Total Credit Sales​)×365

3. Days Payable Outstanding (DPO): How long you take to pay suppliers.

   DPO=(Accounts Payable​ / Cost of Goods Sold (COGS))×365

A well-managed CCC can significantly improve your cash flow, enabling smoother operations and financial flexibility.

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Strategies to Reduce Your Cash Conversion Cycle

1. Speed Up Collections:

   • Invoice promptly and clearly.

   • Offer early payment discounts to incentivize faster payments.

   • Use digital tools to streamline the collection process and send reminders.

2. Negotiate Supplier Terms:

   • Work with suppliers to extend payment terms without straining relationships.

   • Take advantage of any discounts for timely payments if they outweigh the benefits of extended terms.

3. Optimize Inventory Turnover:

   • Analyze sales data to maintain optimal inventory levels and avoid overstocking.

   • Implement just-in-time (JIT) inventory systems to reduce holding costs.

   • Regularly review product performance and phase out slow-moving items.

Monitoring and Analyzing the Cash Conversion Cycle

To keep your CCC under control, regular monitoring is key. Here are some tips to stay on top of it:

• Track Metrics Consistently: Use accounting software to calculate and monitor DIO, DSO, and DPO regularly. You may track some or none of these…each business will be different in what the focus should be.

• Set Benchmarks: Compare your CCC to industry standards to identify areas for improvement. Do you know what resources to look into?

• Review Trends: Watch for increases in DIO or DSO, which may indicate inefficiencies in inventory or collections.

• Adjust Strategies Proactively: If your CCC is lengthening, revisit your collection policies, supplier terms, or inventory practices.

That’s all for this week. Short and sweet, but super important to remember!

BG

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