Cash is king when it comes to holding your business’s value high. It’s the second most important aspect of any business, right after profit.
However, profit can be manipulated on your balance sheets — but cash can’t. It’s safe to say your cash situation is engraved on stone and you can never manipulate it. But — there are steps you can take to make your cash situation look better.
You see, there are tons of reasons why you want to make your cash situation look better. For instance, investors use it to determine whether to invest money in your business. Banks use it to determine whether to extend financing to you.
One of the most important aspects of maintaining an appealing cash flow is a quick Cash Conversion Cycle (CCC).
In this article, we talk about CCC; what it is; what it means for your business; and how it affects the cash flow of your business.
What is the Cash Conversion Cycle?
Your company’s CCC is the time it takes to convert cash into inventory and then convert that inventory back into cash. Simply put, it’s the time you take to purchase products and resources for your inventory, sell them to your customers, and receive payment for them.
The shorter your CCC, the better your cash flow situation is.
How is that, you ask? Well, if you have a short CCC, that means your company has to stay in a “broke” condition for a shorter period. When you use your money to buy your inventory, your cash situation goes down as you’ve just invested the money. If a financial situation occurs and you need instant cash to deal with it, you might end up in a tricky situation because you don’t have enough cash at hand.
That’s why it’s important to shorten your CCC and convert your inventory to cash as soon as possible. Having cash at hand enables you to deal with unexpected circumstances and grab opportunities with ease.
How to accelerate your Cash Conversion Cycle
There are multiple steps you can take to accelerate your CCC, and hence, improve your cash situation. Below-mentioned are some of the best practices you can adapt for this purpose.
1. Ask your customers to pay sooner
This might seem like an overstatement, but most customers will be willing to pay you sooner if you just “ask nicely”. You see, many customers end up paying for services late because the business just doesn’t emphasize fast payments.
All you have to do is just give some friendly reminders to your customers that their fast payments will be really appreciated.
2. Give incentives to fast-paying customers
You can add to the previous tactic by giving incentives to customers who pay sooner. This incentive could be of any kind; a discount; a coupon code; a free product — or anything else that may be of value to the customer.
Customers who can afford to pay faster will appreciate your incentives, helping you retain them as loyal customers for longer periods.
3. Schedule your invoices strategically
If a specific customer usually pays on the 1st day of every month, it’s a great idea to send them an invoice a few days prior. If you send an invoice after the 1st day of the month has passed, you might have to wait for the next month to get paid.
Hence, you need to time your invoices in a way that the customers fill them out as quickly as possible.
4. Optimize your invoices
One of the major reasons customers take longer to pay an invoice could be their complexity. You see, your invoices need to be simple and easily digestible; so your customers can fill them out without any technical errors.
Doing so will ensure your invoices don’t get delayed unexpectedly before they’re eventually paid off.
5. Be quick with your services
You must do everything you can to speed up your services. Simply said, if you process and deliver orders faster, you will get paid quicker.
This is not an exhaustive list and represents only a few of the many steps you can take to speed up the CCC of your business. Please feel free to reach out to me should you want help analyzing and improving your Cash Conversion Cycle. I’ll be happy work with you to make all the necessary adjustments possible to ensure your business is running at its peak efficiency and put Cash back in your pocket.
Key takeaways
Cash is one of the most important aspects of any business model — and you should do everything you can to make your cash flow better.
In this article, we have talked about the Cash Conversion Cycle, an essential component of your cash flow situation. Shortening your CCC lets you keep your cash situation at its peak for extended periods, while minimizing the risk of financial breakdowns.
Written by Steve Fisher
Steve provides CFO level strategic guidance to privately owned businesses. Steve does not provide CPA or legal services. No tax or legal advice here. He can be reached at (404) 931-4430 or fisherst67@gmail.com.