How to Shorten Your Cash Conversion Cycle

Is your cash-strapped business looking for ways to improve cash flow without needing to find additional financing?

Improving your Cash Conversion Cycle (CCC) is a key method for improving your cash flow without having to look externally for assistance, strengthening the business from within. CCC is the measure of how long it takes a company to convert inventory, investments, and resources into cash. Savvy companies will analyze this metric to understand how long money put into the business is tied up before it is converted into sales and cash is received.

Accelerating cash inflows allows businesses to cover payroll and pay operating expenses on time. So, how can you strategically increase your cash position?

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Eliminate Excess Inventory
Inventory that sits for a long time before being sold prolongs the Cash Conversion Cycle, tying up cash so it is unusable to the business. Carefully analyze and change your purchase practices – find a balance between having too much inventory and not enough.

Get rid of inventory that has been sitting around far too long, even if it is at a loss. Remember, recouping something is better than nothing because no cash is being generated from unsold inventory. Once this inventory is gone, you can free up the business to sell products that move quickly, infusing cash into the business. Instead of holding onto old inventory, prioritize acquiring and selling your core products. 

Encourage Prompt Payments from Customers
It may sound obvious but getting customers to pay their bills quickly requires that they receive their bills quickly. After all, customers cannot pay their bills until they have received them.
Send invoices immediately – do not wait to batch them. Use automated software to get invoices out right away and follow up as the deadline approaches. Clearly convey how much is due and when. Then begin the collections process immediately when customers are late to pay.

Incentivize customers to pay quickly by:

• Providing better rates for faster payments or cash discounts
• Offering rewards or incentives for prepayment
• Increasing rates for customers that are chronically late

Reduce Collection Float
Paying an invoice by check results in a payment delay when the check must be physically mailed and processed by the receiving company before the money can be transferred from the customer’s bank to the company’s bank. During this waiting period the customer has paid the bill, but the company cannot yet use the funds. This is known as collection float.

Eliminating checks as a form of payment in favor of credit card, virtual payment, or ACH transfer is always an option. But, if your company relies on checks as a primary form of payment, work with your bank to figure out what your options are to get paid more quickly. Your bank may be able to offer lockboxes, local accounts, or other options to get checks deposited into your business account faster.

On your own end, you can decentralize accounts receivables, allowing customer payments to be submitted to their closest business branch instead of the corporate headquarters.

Hire the Right Personnel
Of course, knowing which methods can be used to accelerate cash inflows is only one piece of the puzzle. A well-planned financial strategy is nothing without effective execution. Ask yourself, “Do we have the right financial personnel in place to shorten our cash conversion cycle, or do we need to bring in some help?” To get the right finance or accounting professional at the helm, utilize a financial recruiting firm to bring in a controller, accounting manager, or finance manager.

Want more transparency into your current cash situation? Use the free cash flow calculator tool from our partners at CFO Selections to better understand your cash needs.