It’s time to reinforce the importance of managing cash, especially at this midyear point when business is robust. This is the time of year when I see many companies taking their eyes off their cash-conversion-cycle strategies in order to focus on “more important” things.
But cash conversion is and always will be one of the pillars of success for any company and shouldn’t be ignored. The presence of cash is the oxygen that fuels your growth, and the lack of it will stunt it. Let’s see how effectively your cash is working for you.
By way of review, the cash conversion cycle measures how long it takes for a dollar you spend on anything such as equipment, payroll, rent, marketing or subcontractors to make its way through your business and back into your pocket. We always want to accelerate that rate, which means focusing on activities that will get that dollar back into your pocket faster.
How do you do that? By focusing on the four critical activities that affect your cash.
1 The first activity is your sales cycle, meaning how long it takes to sell your product. Do you know how long your sales cycle is? If not, make certain to map it out.
2 Next is the production or inventory cycle, or how long it takes to make your product or get the inventory you need to do it.
3 Third is the delivery cycle, which is the time it takes to deliver your service or complete your project.
4 Last, but certainly not least, is the billing and payment cycle. No surprises here; the faster you bill and collect payment, the better off you’ll be.
Now that you know the four key activities that have a significant effect on your cash, do the following: explore with your team the best way to improve and shorten each one of the cycles. Discuss methods to eliminate mistakes from occurring in each cycle. And lastly, come up with ways to improve your business model and P&L (profit and loss). For example, try billing twice a month instead of once, or better yet, get prepayments for your services.
I promise, the time you spend on these activities will breathe new life (and cash) into your business for years to come.
Judith M. Guido is chairwoman of Guido & Associates, a business management company. She can be reached at email@example.com.