When your business receives a dollar from a customer, how long does it take for that dollar to become a dollar again? Cash comes into your business, that cash becomes inventory or other resources and eventually gets turned back into cash. This process is known as the Cash Conversion Cycle (CCC), or cash cycle for short. In this article, we’re going to discuss some cash cycle solutions for your business to optimize collections.
Why the Cash Cycle Matters
The less time your dollars take to become dollars again, the more efficient your company becomes. Streamlining business services and delivery times of your product or service helps dollars generate more dollars faster when they go through the cash cycle.
Calculating the CCC is a simple formula:
DIO + DSO – DPO = CCC
Let’s break that down:
- DIO = Days of Inventory Outstanding. This is the time it takes to transform your inventory into finished products and then sell them. To find your DIO, take your average inventory, divide it by the cost of the goods that have been sold, and multiply that figure by 365.
- DSO = Days Sales Outstanding. This is the average number of days required for collecting accounts receivable. Calculate this by dividing accounts receivable by net credit sales, and multiplying the result by 365.
- DPO = Days Payable Outstanding. This is the average time it takes for your company to buy items from vendors and then pay them (accounts payable). Take your accounts payable and divide by the cost of goods sold each day (i.e., the annual cost of goods sold divided by 365.)
The lower the CCC number, the better. In fact, this number can even be negative, which means your business has maximum liquidity with its cash flow, and your money isn’t tied up in an unusable state anywhere in your business process.
Finding Cash Cycle Solutions
Now let’s find some cash cycle solutions (CCS) to boost your company’s CCC number.
Analyzing Cash Flow
Knowing where your dollars are going is essential. Monitor your accounts payable, your accounts receivable, and your total billings. The better grasp you have on your cash flow, the more control you’ll have over your business. This is the first step in improving your financial operations and speed of collections. If you’re not already, use an accounting program such as QuickBooks or Xero to help you organize and analyze all of your expenses and revenues so you can make smart business decisions.
Moving away from human labor to software for things like remittance processing or transaction processing services leads to financial optimization. If a process can be handled by a computer, human error will decrease and cash will flow faster.
You need to look at your accounts receivable and account payable process thoroughly to determine if there are more opportunities for automation. Automation can also help speed up everyday tasks since they will happen automatically and not require waiting on an employee that may have many different responsibilities.
Make your invoices easier to read and understand. Time your invoices to coincide with customer payment cycles. Be clear with your customers upfront about your payment terms and expectations. Make sure you have a regular follow-up cadence using messaging sequences + supporting with phone calls where needed. We also recommend using text messages and bringing in a second voice when needed. We automate all of this at HappyAR.
You can even outright ask that customers pay sooner once the project is underway. You’d be surprised how often this works!
You shouldn’t have to let things get to the threatening collections stage; your customers may have just forgotten and need a reminder. They may also just not be getting your message, that’s why it is important to run an omnichannel approach with your invoice follow-up. Whatever client services you offer, treat your customers well and they’ll keep paying on time.
Outsourcing Where Possible
If you’re the vice president of the company and you’re doing number crunching grunt work, you’re not doing your business any favors. Your time is better spent elsewhere.
Shortening Sales and Delivery Cycles
Make sure your sales team is equipped with enough incentives, tactics, and flexibility to maximize their win rate and minimize their time to close a deal. The more business you close faster, the better cash cycle solution you have.
Once you have won business make sure to always complete outstanding projects as quickly as possible. If you’re having trouble making deadlines with your products or business services, find out what similar companies are doing better and put those best practices to work.
Lower Your Cash Conversion Cycle with HappyAR
HappyAR is a seamless SaaS that quickly and easily boosts your accounts receivables work. We save companies of all sizes thousands of dollars each year by optimizing the speed and efficiency of their collections methods. No more guessing if someone has received an invoice or trusting that it will be paid on time. This is a fully integrated solution that pays for itself over and over each month by preventing defaults and preserving client relationships.
HappyAR is an ever-evolving toolkit that helps optimize your invoice collections process and our solution starts at $0/month and scales up based on your invoice volume. Visit us at www.happyar.com to learn more.