During a Cash is Clear Mastermind recently, I was asked, "How do you calculate the cash conversion cycle?" My response...
"I don't calculate the cash conversion cycle for clients!"
It's not a good use of time because a single number does not mean anything in a vacuum.
What do I focus on instead?
I focus on the component parts of the cash conversion cycle and if they are optimized.
"Optimized" means they are the right terms, conditions, and business strategies to optimize the business.
For example, the cash invested in inventory starts the cycle for a manufacturer.
The automatic response and conventional wisdom is, "Reduce your inventory!"
My recommendation: Analyze your inventory to understand where there are too much, too little, and "just right" amounts.
You might find that overall, you have too little of a lot of your inventory and need more.
You'll also find obsolete inventory, overstocked inventory, and products that should be end-of-lifed.
You can also analyze your purchasing practices.
1️⃣ Are you purchasing in amounts that are too large or too small?
2️⃣ Do you have the right distributors and the best prices, terms, and conditions?
3️⃣ Are your supplier's business partners giving you a strategic advantage or another vendor?
4️⃣ Are you looking at "total cost of acquisition" or simply scraping for lowest unit prices?
Apply similar logic and analysis to work-in-process, finished inventory, selling terms and conditions, and the profitability of products and clients.
The result of making these adjustments will be an astounding breakthrough in profitability and cash flow!
Would you like to learn about a specific cash management topic? Contact me at [email protected] or on LinkedIn at linkedin.com/in/ HYPERLINK "https://www.linkedin.com/in/dsafeer/"dsafeer HYPERLINK "https://www.linkedin.com/in/dsafeer/"/ to introduce yourself, share ideas, or ask me questions about maximizing your business cash flow.
David Safeer is a globally recognized expert in cash flow optimization and the founder of David Safeer International, which educates and advises accountants and CFOs on cash flow and profit maximization strategies for their clients. His work has impacted hundreds of businesses with revenues from $1 million - $20 million in 40 countries.