Inside the January issue:
Question of the month: How do you "own" a key business process? Find the answer at the end of this newsletter.
BY Sean Battles
January 28, 2005
Complete Cash to Cash Cycle
- Reduce inventory to Just-in-Time levels and save $250,000 .
- Increase efficiency by reducing your receivables Average Days' Collection, creating more cash on hand.
- Boost sales and marketing Cycle Efficiency and reduce your expenses.
- Increase payables to increase cash from automating tasks, taking more discounts and Managing the Process better.
In the past four weeks, we've brought to light four key areas in which you can save $250,000 each -- for a total of $1,000,000. Point by point, we've shown you just how cash flows through these areas, making up the Cash to Cash Cycle.
And as we've seen, the cash cycle is undoubtedly the single most important process to optimize for any business – from when you spend money to when you get money.
So now let's put it all together.
Time on Your Side
One way to express this is the length of time between the purchase of Inventory (raw materials, etc) and the collection of Accounts Receivable created from the Sale of your product -- also called the cash conversion cycle. Why is this most important? Because this is your cash flow and because…
Operations and Working Capital
Businesses live and die by the cash generated from operations. If your operations don’t create cash, then they consume it. A cash-consuming operation means that you have negative cash flow and you are living on financing (debt or equity). But the Cash to Cash Cycle also shows you the amount of working capital you have committed to your organization.
Just add the number of days of inventory to the number of days of receivables outstanding, and then subtract the number of days of payables outstanding. The result is the number of days of working capital your organization has tied up in managing your supply chain. This can be quite a significant number, not one to overlook.
Investments and Inefficiencies
Did you realize that working capital is the investment you are making in the inefficiencies of your processes and procedures plus your investment in your suppliers’ and your customers’ inefficiencies too?
But wait, we are still talking about the cash to cash cycle, right?
That’s right, so now you can see the relationship between your cash flow, your working capital and your cash to cash cycle. In order to increase your cash flow, you need to increase the velocity of your cash to cash cycle by reducing the inefficiencies found in your processes, your suppliers’ processes and your customers’ processes. The result is a decrease in your working capital and an increase in your cash. And, as we've seen, this can be a significant number that you shouldn’t overlook.
Reader Feedback
Discussion: We've been talking up a storm about cash savings in core areas of a company. But what do you say: can YOU save $1,000,000 in your business?
We've gotten some great comments so far! Thank you, and let's keep it going!! Write me at sean@bizmanualz.com.
"I was able to read your article on Receivables. This will help me so much in my budding career as a consultant (I am a CPA located here in the Philippines). I appreciate so much your emails to me. More power to you."
- Bernardino De Leon, CPA and consultant, Philippines
"I am getting your [e]mails along with lots of information. Thanks for such useful thoughts. "
- Suman Dhawan
Valuable Links
On That Note
Answer to this week's question:
If you are the one who measures the results, then you are also the one who manages and "owns" that process. Learn how to improve YOUR processes in the February issue.
Best,
Sean Battles
Marketing Manager
Bizmanualz, Inc.
P.S. And, remember, I want to know what you think. So please email me at sean@bizmanualz.com with any comments, questions, stories, or just to say hello.
