What’s slowing down your cash conversion cycle?

CFOs, finance leaders, and business owners are facing multiple challenges, from fear of a recession, rising interest rates, and continuing inflation to supply chain snafus, and more. At a time like this, having optimal control over working capital is what finance leaders rely on to grow their businesses. However, the longer it takes to access that working capital, the longer the business is likely to suffer. That’s why it’s essential that companies speed up their cash conversion cycle (CCC).

The need for speed in your CCC

The CCC is an important metric that measures the number of days it takes for a company to convert its investments in inventory and other assets into cash. The faster that takes place, the more working capital you’ll have on hand to make the investments and implement the initiatives that will lead to greater growth. For some organizations, that might mean expanding into new markets; for others, it could be preparation for mergers and acquisitions; for still others, it could mean investments in new products and product lines. Whatever the goal, the need for liquidity is clear. And that means the need for a shorter CCC is vital.

It’s also important to ensure that liquidity is affordable. What do we mean by that? If your available working capital comes from bank loans or maxing out a credit line, those short-term funds can lead to long-term financial problems for your organization. So, the goal is to get the cash owed to you at the time agreed upon in customer contracts (or a shorter timeframe, if possible).

A CCC slowdown can be caused by many factors

There are numerous reasons why a CCC may lengthen; finance and procurement leaders have greater control over some of these more than others. Sometimes, depending on the size of your business and resources, effectively shortening your CCC can be extremely difficult. For those businesses, and even for those who want to expend their efforts on more value-added initiatives, working with a managed services provider is a great answer. Each of the factors listed below will be followed up with the way in which a managed services provider can be the answer.

• The JIT inventory conundrum – Few things are as important to a company as having the right amount of inventory. The just-in-time (JIT) inventory concept has been a ruling one for decades. This concept, where you receive goods and raw materials from suppliers only as needed or on a tight timeframe to reduce excess inventory sitting on shelves began in the ’70s but really took off in the ’90s. It made sense since excess inventory is just money tied up and therefore, inaccessible. Going “lean” in many ways was the business mantra for years. Then COVID hit and lean suddenly turned into unavailable as supply chain shortages mounted, leaving companies and customers without the items they needed and wanted. As supply chain volatility eases up (although it is by no means completely resolved), procurement has to build up inventory to limit any future shortage risks. Then you’re back to “how much is too much” when it comes to stacking shelves. That’s why days inventory outstanding (DIO) is such a vital metric and why inventory management has taken on so much importance for every company. If you don’t have inventory to sell, you don’t have cash inflow. And if you have excess or unsold inventory, that’s cash tied up, meaning you’re not converting anything and thus negatively impacting your CCC.
  • Better inventory management – How much inventory do you have on-hand? Managed services can provide data analytics that forecast demand, enabling your procurement team to optimize its inventory and reduce stock accordingly, ensuring your average inventory can answer customer demand. A provider can also assist in showing clients how to improve the way they purchase through strategic sourcing and connecting to a Global Purchasing Organization (GPO). This will not only help manage inventory, but also cut costs of goods.
• Their DPO vs. your DSO – Liquidity is as valuable to your customers as it is to you. They want to hold on to their cash longer so they can have the working capital they need to grow their business. Unfortunately, extending a customer’s days payable outstanding (DPO) only lengthens your days sales outstanding (DSO) exactly at the point where you’re trying to shorten it. According to the Institute of Finance and Management (IOFM)’s 2022 Cash Management Survey, “43 percent of businesses report that 11 percent or more of their receivables are more than 90 days past due.” But pushing a customer too hard can end up harming a productive and necessary relationship, so accounts receivable (AR) may have to tread a bit lightly with accounts payable (AP) when it comes to chasing down payments. This can be difficult at times of economic uncertainty like today.
  • Speed up payments and trade financing – If you are currently on a 45-day DSO, imagine what being paid in 15 days – guaranteed – would do for your cash flow, your forecasting…and your organization’s balance sheet. Plus, imagine doing this without negatively impacting your relationships with your customers. Some managed services providers can offer funding that allows you to get paid on the optimal date and leaves the invoice payment collection up to the managed services provider. Even more positive, a non-recourse guarantee is built into managed services arrangements. So, regardless of whether your customer ends up paying or turns out to be a bad credit risk, you won’t be responsible for bad debt. That’s the managed service provider’s problem.
• Giving credit where credit isn’t due – This reason should be viewed in tandem with the reason directly above. Extending credit to customers is a pretty customary thing to do, but if a business doesn’t do its due diligence when establishing creditworthiness, that gesture may come back to bite you. Investigating whether to extend credit shouldn’t be a one-and-done situation either. Things change and a customer that might have been a reliable payer at some point may have come upon hard times; so, credit managers or those on the finance team need to constantly check on a customer’s business. Not doing so will negatively impact your cash flow and result in bad debt.
  • Continually checking customer creditworthiness – As noted above, this task can be burdensome and time-consuming. And not having the latest information can cost you deeply. A managed services provider will digitally collect credit information and route it for review. In addition, data analytics will assess how creditworthy the customer is. Having this information in hand will inform how you do business with this customer.
• Flying blind when it comes to cash flow – Knowing exactly where your cash is, in real time, is absolutely essential to being able to properly manage cash flow. But far too many customers still rely on paper-based, manual tasks and legacy processes that are slow, costly, and prone to errors. Even when processes are semi-automated, different functions are working with different systems and different parameters, so information is fragmented. With no real-time visibility into where payments are, CFOs can’t make informed decisions regarding working capital or corporate spending. They can’t forecast where or when to enable expenditures and this can cripple an organization.
  • Real-time access to financial insights and data analytics – You can’t manage what you can’t measure and you can’t measure what you can’t see. Managed services providers collect financial data and analyze it in real time, so CFOs have the insights to make the right decisions when it comes to working capital. Dashboards can provide real-time visibility into Key Performance Indicators (KPIs) and the current status of payables and receivables. The deeper the analytics, the faster your finance team will be able to identify trends or roadblocks that are hampering your CCC.

A managed services partner can relieve the burden of business which is no longer “as-usual”

Business as usual is a phrase that doesn’t mean as much as it used to with everything changing at an accelerated pace. It’s especially true when we see where the nation’s and the world’s economies are at the present time. That’s why going it alone may not work for many organizations and turning to a managed services provider may be the right answer for the right time.

To learn more about shortening your CCC by leveraging managed services, download the full white paper.