Reduce Your Cash Conversion Cycle With These Tips From Penn State

By Paige Pulaski

Reduce Your Cash Conversion Cycle with These Tips from Penn State

The key to unlocking funding for business growth is tied up in your cash-to-cash cycle time.

[Sidebar: for those of you reading that operate without a supply chain, the Cash Conversion Cycle (CCC) is the time period (days) between when a business pays cash for materials or inventory, and when payment is received for goods sold. Basically, how long it takes your business to earn the money back you used to purchase what you’re selling.] 

In our recent webinar, Steve Tracey, Executive Director of the Center for Supply Chain Research (CSCR™) at Penn State, revealed three new ways to look at your supply chain to help shorten your CCC. By implementing a supply chain solution that spans end-to-end, you can address the three primary drivers of CCC –

1. Inventory
2. Accounts payable
3. Accounts receivable

On-Demand Webinar | Reducing Cash-to-Cash Cycle Time

On-Demand Webinar | Reducing Cash-to-Cash Cycle Time
Watch the supply chain webinar.

Watch Now

Focus on Your End-to-End Supply Chain View

The sneaky thing about supply chains is your realm of influence only encompasses the activities of your suppliers, your company, and your customers. What often gets left out of the equation is your suppliers’ suppliers, your customers’ customers, and so on.

Steve Tracey shared these three focal points when deciding what to attack first:

1. Optimize Inventory

Perhaps one of the most challenging tasks for supply chain leaders is balancing the amount of inventory in stock to be both quickly responsive and to minimize the amount of cash tied up in assets.

To release cash from warehousing and inventory while still stocking enough to meet customer demand, start to assess these processes from end-to-end:

• Reduce product design complexity
• Manage supplier lead time
• Adopt logistics techniques (e.g. JIT and VMI)
• Eliminate unnecessary channel intermediaries
• Improve sales forecast and demand planning

2. Optimize Procure-to-Pay Cycle

Supply disruption risks can (and almost inevitably will) cause unexpected hiccups in the time taken to pay suppliers. While you’re trying to lengthen the time in between payments (to keep as much cash available as possible), impacts on suppliers’ cash flow can make payments unpredictable.

However, on the bright side, level-of-service agreements and potential discounts from early payments can help you optimize the amount you keep in pocket. Look for opportunities in these areas of your supply chain:

• Monitor contract compliance to minimize payments made earlier than agreed upon terms
• Streamline invoice acceptance and payment processes
• Rationalize supplier base for greater leverage in contract negotiations

3. Optimize Order-to-Cash Cycle

The invoicing process is variable, depending on time, reliability, and accuracy. Ultimately, when the customer begins processing the shipment delivery for payment, a lot has gone into the process to ensure its timely and correct.

Minimizing this order-to-cash time while still maintaining a high order completion rate, consistent on-time delivery, and infallible invoice accuracy is difficult. Try breaking up your process into these smaller sections to see where you might be able to start shortening your Order-to-Cash time:

• Automate invoicing processes (speed and accuracy)
• Actively follow up outstanding invoices and underlying reasons
• Be strategic with the range of credit terms offered to different customers

Keys to Getting Buy-In from the Top-Down for CCC Improvement

Because CCC is a cross-functional concern that extends to external supply chain collaborators, like suppliers, customers, and third-party logistics providers – in order to gain sustainable improvements in CCC, developing cash management culture is imperative.

Watch the webinar recording to get more context around the tips below, but the main point is culture is sustained through all levels, from employees, to managers, to executives, and back again.

Some things to keep in mind to ensure cash management culture implementation:

Get executive buy-in to create your shared vision – Effective cash-to-cash cycle time reduction processes should start with a “tone at the top” directive from the board of directors, CEO, and CFO. Improved communication processes (e.g. moving to dialogues versus one-way communication, like town hall meetings) will help align your team around the core idea presented by your organization’s leaders. With the additional aid learning tools – with content curated to your business – change champions will emerge from your work force, further emphasizing the vision set for you by executives.

You must focus on every step of the process – Successful cash-to-cash cycle time improvement requires broad engagement across procurement, sales, inventory management, and finance functions, as well as external collaboration with suppliers, customers, and third-party logistics providers.

House all your data in one system – The accumulation and use of data are qualities of an effective working capital management system. Centralizing and standardizing financial transaction processing can enable companies to draw meaningful insights from underlying data. Implement custom dashboards so you can see where you’re on track, off track, and at risk at-a-glance, and see across all your plans at once for 360° visibility.

Implement, Operationalize, and Sustain Your Processes for CCC Improvement

More importantly, creating change in your supply chain from end-to-end isn’t worth the effort if your team isn’t committed to implementing fully, building a process around your new operations, and working with your culture to sustain the changes you’ve made.

Without a strong roll-out, buy-in isn’t there from the beginning to give the new solutions and processes a true shot. Focus on changing the hearts and mind of your employees by leading by example, and sharing your vision.

You must operationalize any new changes to process – they should become the new normal. Document, train, monitor metrics, analyze, and make it better. This will help with the “stickiness” of your new end-to-end solution.

The key to maintaining buy-in is to ensure your culture is centered around a shared vision – in this case, cash management. With one idea at the core of all your business operations, all team members can apply force in the same direction at the same time, making it easier to reach your goals.