With ongoing credit constraints, global pandemics, and ships blocking canals, it’s not an easy time to be a manufacturer. As a building materials manufacturer, you need to maximize your cash flow in order to stay abreast of seemingly sudden changes in the market. A key way to do this is to examine your current cash conversion cycle, also known as cash to cash cycle time (CCC) and find ways to improve the time it takes to get paid.
What is a cash conversion cycle time? Essentially, cash to cash cycle time is the number of days from when you purchase (investment made) raw materials through delivery and receiving payment(return on investment) from your customers.
What is a Good Cash Conversion Cycle?
You might be wondering, is cash conversion cycle time an industry-wide problem? And the answer is a resounding, yes. In 2020, APQC found in a survey of more than 6,200 firms, that the median of days for cash to cash conversion was 54 days. With top performers taking as much as a month or more (33.2 days) and bottom performers taking as many as 74 days to complete their cash conversion cycle. In an economic period where rapid technological advances and global events are constantly shifting supply chains and market demand for products, improving your cash conversion cycle time is paramount.
How to Improve Your Manufacturing Cash Cycle Time
1. Keep clean financial records.
Your business’ financial records are really the hub of the wagon wheel of your enterprise. All spokes of the wheel, from sales, marketing, operations, human resources, procurement, logistics, everything ties back to your financial data. This is why it’s so important to maintain clean and accurate financial records. It’s not just an issue at tax time, but successful and healthy companies know their numbers. In practice, this could look like making sure your customer records are promptly updated with returns and other credits so that they can be billed correctly without needing to go back and change things before the customer pays. Another way to keep financial records clean is to make sure you’re performing routine bank reconciliations and are reviewing accounts payable and accounts receivable reports on a regular basis, especially if you don’t have staff that are primarily responsible for these roles. What you don’t know can hurt your business.
2. Understand what those financial records are telling you.
Your gut feeling is probably not the best tool for making business decisions. From CFO.com “APQC found that companies using advanced analytics and predictive algorithms for supply chain planning have an average CCC of 56 days, compared with 65 days for companies that make decisions based on instinct or anecdote.” For example, if your competitor ACME Wood Products Inc is using advanced analytics to manage their supply chain, and you’re simply relying on your past industry experience, with everything else equal, they're going to get paid 9 days earlier than you. They are now poised to respond more rapidly to changing market needs and opportunities, while you’re still waiting to get paid. It’s no longer a good business strategy to base your business decisions on past experience. With a veritable smorgasbord of data mining and analysis tools, it’s critical to base your decisions on qualitative data.
3. Make sure that the lines of communication between sales and finance are clear and open.
While tools such as predictive algorithms and yet more software may seem cost-prohibitive and time-consuming to implement, having your sales and finance team on the same page is relatively easily and cheaply implemented. With open lines of communication between these two core areas of your business, you’ll save time and money throughout the entire cash conversion cycle. Miscommunications regarding purchase orders, discounts, shipping, refunds and other credits, inventory, partner programs and a whole list of other issues bleed cash and build mistrust between your company and your customers.
4. Rein in those extended terms.
You’re not your clients’ bank. Stop acting like it. 30 day terms are ok. But with net 45, 60, and even 90 day terms, your customers aren’t feeling any sense of urgency in making sure they pay you in a timely manner. Your company needs cash to grow and adjust business strategies due to ever changing market forces. By allowing your customers to put your company and your invoices on the back burner, you’re giving up the ability to take advantage of opportunities that require increased liquidity.
5. Offer an early payment discount.
By offering even a 1 to 2% discount for payments within 10 or 30 days can be instrumental in closing the gap in your CCC. Rather than letting your invoices languish for 90 days (or more!), your customers are incentivized to prioritize your invoices. Offering early payment discounts also shows that you understand your general contractor’s slim profit margins and your role in helping your customers become more profitable.
6. Offer your customers easy payment options.
This may seem redundant, but the easier you make it for your customers to pay you, the quicker your customers will pay you. Switching from paper checks to ACH or EFT payments is a great way to bring your cash conversion cycle time down. Implementing isn’t expensive or difficult either! Simply creating an ACH authorization form and providing it to your customers with the initial invoice and other onboarding documents makes it a relatively easy switch. As far as enrolling your company to accept electronic payments, there are a number of platforms out there that can accommodate your company’s needs. In fact, the best place to start is with your accounting platform as most have native credit card/debit card and ACH processing options for very low cost.
Overcoming Long Cash Cycles in Manufacturing
By improving your cash conversion cycle time, or cash to cash cycle time, you’re positioning your company to have greatly increased cash flow. The result being that both on paper and in the bank, you have greater liquidity, fewer unsecured assets, and can minimize your business’ own liabilities. Better liquidity and shortened cash conversion cycle times can make sure your business is able to be agile both in strategy and procurement in a rapidly changing world.
Hayes, A. (2021, March 7). Cash Conversion Cycle (CCC). https://www.investopedia.com/. https://www.investopedia.com/terms/c/cashconversioncycle.asp
Wiggins, P. D. (2020, September 2). Metric of the Month: Cash-to-Cash Cycle Time. cfo.com. https://www.cfo.com/cash-flow/2020/09/metric-of-the-month-cash-to-cash-cycle-time/