SCALE Up with the Cash Conversion Cycle
I facilitate planning retreats every week and I’m always fascinated by the concept of the CASH CONVERSION CYCLE and how it engages every person in the room. Typically, the concept of cash is left to the business owner and the Controller and/or CFO. Cash is like oxygen for the business. Without it, the business simply dies. So the question is “how can we generate as much cash as possible to fuel growth and reduce the need for outside financing?” There are four parts of the CASH CONVERSION CYCLE and all four need to be analyzed and shortened as much as possible:
|1. Sales Cycle||2. Make / Production Cycle||3. Delivery Cycle||4. Billing Cycle|
1) Sales Cycle
Shortening the sales cycle has an impact on cash! What are the ways the sales team can get to the market faster and less time between steps? How long does it take to bring a new product to the market? What is the R&D process like? How can we speed it up? The sales team is never asked to think about sales in the context of cash conversion. And you’ll be surprised what they come up with when asked. For them it’s really commission conversion cycle and they will become great advocates for the initiatives.
2) Make / Production Cycle
Shortening the make / production cycle has an impact on cash! What are the ways to speed up inventory turns and reduce inventory? How can the sales team get better orders so things get made right the first time? How can operations be organized to increase flow and capacity? How can LEAN techniques be used to eliminate waste of material and time?
3) Delivery Cycle
Shortening the delivery cycle has an impact on cash! We see so many easy to correct mistakes happen at this stage. And until delivery happens billing usually cannot be completed. How long does it take to complete the delivery of the product or service? Was the customer ready? Did they get exactly what they expected? Did the finished product have to be shipped back for re-work due to miscommunication or improper order taking? Did the product work like it was supposed to? Did Quality Control do their job right?
4) Billing Cycle
Shortening the billing cycle has an impact on cash! Most companies think they are stuck in a billing format due to their industry norms. The reality is most clients are willing to pay faster or are willing to change when billing happens. The trick is you have to ask! For example, instead of billing everything at once after the service is completed, consider X% up front and progress billing. If you typically bill monthly, start billing bi-weekly. If you bill bi-weekly, start billing weekly. If you are a service based business and usually bill for work after it was performed, start billing for work before it is performed.
Look for 100 hundred ways to shorten cycle times and never stop looking. Make it a point, each quarter, to find an area the company will focus on and improve. I guarantee when you look at your business through the lens of cash you’ll realize when you make cash improvements you are also making significant process improvements.