Measuring your “Cash-to-cash Cycle” (C2C), means figuring out the time it takes for a dollar to go out the door until that cash comes in from sales.
This can sometimes be an eye opener for some business owners that haven’t taken the time to realistically track conversions cycles for:
- Inventory purchases
- Stock holdings and
- Sales lead times
- Value added stock - WIP (Can't be sold until other items are added)
Holding inventory is a silent killer for SMEs, creeping up over time, locking up critical working capital better spent elsewhere.
Calculate your cash-to-cash cycle: stock days + debtor days - creditor days.
[ecko_annotated header="C2C cycles change with each business" annotation="Keep in mind that every business's cash flow cycle is different depending on your industry so be sure to calculate it without leaving out any stages in your own business."]
Essentially a business with a longer C2C cycle will require additional net working capital to a business with a shorter cycle and can sometimes look less attractive to investors, so it pays to tighten up wherever you can.
There are of course a few factors that affect the C2C cycle including:
- Average time it takes for debtors to pay
- Time it takes for inventory to sell as finished goods
- Time it takes for inventory to transit from suppliers
- Credit terms if any from suppliers
- Time it takes to convert raw materials to saleable items
- Dead or slow moving stock
- And others, depending on your situation.
To lessen this problem and free up cash flow, small businesses need to put controls in place.
Inventory needs to be analysed many times during your businesses sales cycles, especially during a growth phase to minimise the impact on net capital being tied up.
Finding arrears you may not have clear visibility over such as dead or very slow moving stock is critical. Bleeding capital through dead or slow-moving stock can eventually strip a business of profits.
This is where predictive analytics can play a significant role
Before you think that this term is over your head, there are numerous tools available that can take the guesswork out of future customer buying behaviours that can help you reach a happy balance between demand and supply.
These tools start to deliver the best results once you have been using them for long enough to gather some useful data such as:
- Purchasing patterns
- and supply cycles etc.
We recommend using them from the start and if possible migrating old data over from any other system you (hopefully) have been using.
Let’s look at one example:
Say you’re a manufacturer and you know how many widgets you sell on any given day, including the raw materials that go into making your goods.
You know it takes 7 days to get delivery of your raw goods and you have credit terms of 30 days with suppliers.
You know you can turn raw goods into your widgets in 14 days and they sit on the warehouse floor for on average of 7 days until they are sold to customers that you invoice and get paid in 45 days.
So each time you send a dollar out the door you have a cash flow gap of 29 days between paying the supplier and getting paid for the goods you sold. Now managing this gap is the tricky part, as you need enough liquidity or net cash in the bank to cover this period.
So it’s easy to calculate this on a once-off basis, but what happens when you have variables such as weather (overseas shipments), varying supplier delivery times, irregular debtor payments etc.?
Let’s say after 12 months trading you had enough data to accurately track how much cash you need in reserve (on average) to cover normal business activity.
If you knew key metrics such as fixed costs at any time you could identify gaps, never leaving yourself short. This would be a game changer for your businesses growing pains and frustration levels.
You could also accurately determine how much you need to borrow if required without overextending credit lines to the business.
Some intelligent business tools
Most small business owners already have a grip on historical or seasonal trends and how they impact demand and supply. But, as your business grows, predicting your inventory needs becomes more complex.
This is where business intelligence software can help.
Tableau – Rated as a leader in the BI market by Gartner, Tableau is lauded for its intuitive dashboard-based visual data discovery capabilities that can be achieved without extensive skills or training. It’s available as a desktop or cloud version and has specific capabilities for supply chain management.
Unleashed Inventory Management – Possible rated as one of the best cloud inventory solutions that integrates with major accounting providers and e-commerce platform.
It can track everything down to the wire and connect to most popular cloud-based business software systems.
NetSuite – Is supply chain and inventory management software that is extremely powerful and is a great lower cost enterprise system.
There are of course numerous inventory solutions on the market from startups to corporate, this post is to get you thinking about accurately trying to manage inventory to cash.
Go forth and accurately predict how much working capital you'll need to cover the cash gaps.