How To Improve Your Cash Flow & Cash Conversion Cycle
We’ve all heard the phrase “cash is king” and that’s because if there’s anything more crucial to a growing business than profit, it’s cash. While profitability can be manipulated on the balance sheet, your cash is set in stone. Investors and banks know this, and as a result, they will use your cash position to determine your business’ value.
Cash Flow Strategy
When it comes to measuring the health of your business, fundraising, or requesting a bank loan, your cash flow is key. Good thing there are a variety of approaches you can take to generate a positive cash flow.
Cash Conversion Cycle (CCC)
One of the ways you can ensure that your business is generating a positive cash flow is implementing a cash conversion cycle (CCC). A cash conversion cycle is “a key performance indicator (KPI) that measures how long it takes for a dollar spent on anything (rent, utilities, marketing, payroll, etc.) to make it through your business and back into your pocket.” The goal is to get money in the bank before you need to spend it, or in other words, to generate a negative CCC (i.e. -6 days)
You can shape your cash conversion cycle by changing the way your business functions in multiple areas, including your sales, delivery, production, and billing and payment cycles. For instance, you can improve your CCC by collecting payments in full before production. This way you’ll only spend on inventory when necessary.
If you’re wanting to accelerate your cash conversion cycle, here are a few best practices to do so. Here are some of their top suggestions to keep in mind:
- Analyze your cash flow and operations on a daily basis. Keeping better tabs on why things change over 24 hours and comparing your daily cash available to your weekly accounts receivable and accounts payable will give you incredible visibility into your business.
- Ask your customers to pay you sooner. You might be surprised by how willing your customers are if you just ask.
- If you ask your customers to pay faster, incentivize them. Offering a discount to those who pay in advance and sending friendly reminders will bring in cash faster. Plus, customers who are able to pay quicker will appreciate the value they receive in return.
- If possible, time invoices to coincide with your customer’s payment cycles.
- Make your invoices easy to fill out and digestible. If your customers are paying later, that may mean that there are issues with your invoice.
- Speed up the sales and delivery cycles. Completing projects more quickly likely means you’ll get paid sooner.
It’s important to consistently revisit your cash conversion cycle to see how shifting your operations could help it improve. With this insight, you can eliminate mistakes and omit lengthy processes in your operations (i.e. negotiation processes that are holding up your sales team from closing the deal).
Other Ways To Improve Your Cash Flow
Beyond accelerating your cash conversion cycle, there are a variety of areas you can focus on to improve your cash flow.
- It seems obvious, but try increasing your price. If you know you’re building a competitive product, you can give it a competitive price.
- Expand your reach and sell more. You don’t have to increase your prices if you can increase your volume of goods and services sold.
- Look at your operating expenses and your supplier costs and see where you pay less. Perhaps you’re your supplier’s best customer, so you can negotiate a discount. Or, maybe you can cut out a process in your operations that is proving too costly.
- Reduce your inventory. If you have stock on the shelves that’s not selling quickly, it’s costing you. Reducing your inventory ensures you’re only spending on materials and goods you will sell.
Keeping Tabs on Cash Flow
Accelerating your cash conversion cycle and boosting your cash flow means putting in the hard work to evaluate your processes and make the necessary changes. Employing regular accounting practices like forecasting, and reviewing your cash flow statements will help you get the most accurate view of where your business stands and what areas you can improve.
If you decide to work with experts, they can take a look at your current operations, identify the gaps, and show you where you can accelerate your cash flow and cash conversion cycles for optimal efficiency. Give Arena a call to see how we can help!