The Cash Conversion Cycle gives the business owner clarity around how long it's taking between cash going out and cash coming in; in this example it's 76 days.
Simply by working out this calculation the business owner has gained valuable insight into why and how their cashflow is impacting their business.
Reducing the number of days in this cycle significantly improves the business's cashflow and this can be achieved by taking a closer look at your business processes.
For example if Accounts Receivable days reduced by 9 days and Inventory days reduced by 6 days there would be an additional $105,370 in your bank account today (presuming Sales are $3,000,000, Accounts Receivable $420,000, Cost of Goods Sold $1,910,000 & Inventory $320,000.)
There are 7 areas which contribute to the length of your Cash Conversion Cycle and below we've given you some ideas on how to begin reducing the number of days in each area and start enjoying better cashflow today:
1. Accounts receivable
Reduce the time between billing and banking by tightening your Terms of Trade, offering prompt payment benefits and streamlining your billing process to work like clockwork each month.
2. Accounts payable
Review suppliers' terms of trade and discount. Implement budgets, streamlining your payments process to maximise prompt payment discounts and avoid late payment penalties.
3. Inventory process
Review your stock ordering systems and stock control processes and identify strategies to ensure cash hits the bank sooner i.e. think about how you could get your goods out even one day faster.
4. Inappropriate debt/capital structure
Review existing debt and capital structure. Could debt be consolidated and paid off over a longer term? Review and adjust what you're drawing from the business or identify if the business needs a capital injection to fund its growth.
5. Overheads too high
Review your overheads annually. Look at the effectiveness of your marketing spend, go paperless, put expense budgets in place and change your technology platform to reduce overheads.
6. Gross profit margins too low
Review your gross profit margins and know what's left from sales after variable costs are deducted. Increase margins by focusing on rework and wastage, reducing stock shrinkage and improving team productivity.
7. Sales levels too low
Identify ways to increase sales for example focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.