what strategies can a firm use to optimize its cash cycle?

With ongoing credit constraints, global pandemics, and ships blocking canals, it'south not an easy time to be a manufacturer. As a building materials manufacturer, y'all need to maximize your cash flow in order to stay abreast of seemingly sudden changes in the marketplace.  A key way to do this is to examine your current cash conversion bicycle, too known as cash to cash cycle fourth dimension (CCC) and find ways to better the time it takes to get paid.

What is a cash conversion cycle time? Essentially, cash to cash bicycle fourth dimension 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 Proficient Cash Conversion Bicycle?

You might be wondering, is cash conversion cycle time an manufacture-wide trouble? And the reply is a resounding, yes. In 2020, APQC found in a survey of more than 6,200 firms, that the median of days for greenbacks to greenbacks conversion was 54 days.  With elevation performers taking every bit much as a month or more (33.two days) and bottom performers taking equally many as 74 days to complete their cash conversion bicycle.  In an economic menses where rapid technological advances and global events are constantly shifting supply bondage and market demand for products, improving your greenbacks conversion cycle time is paramount.

How to Better Your Manufacturing Cash Cycle Fourth dimension

       1. Keep clean financial records.

Your business' financial records are really the hub of the wagon wheel of your enterprise.  All spokes of the cycle, from sales, marketing, operations, homo resources, procurement, logistics, everything ties dorsum to your financial data.  This is why it'south so important to maintain clean and accurate fiscal records.  Information technology'southward non just an issue at tax time, but successful and healthy companies know their numbers.  In practice, this could look like making certain your client records are promptly updated with returns and other credits and then that they can be billed correctly without needing to go back and change things before the client pays.  Another fashion to keep financial records clean is to make sure y'all're performing routine bank reconciliations and are reviewing accounts payable and accounts receivable reports on a regular basis, peculiarly if you don't have staff that are primarily responsible for these roles.  What you don't know can injure your business.

       2. Understand what those financial records are telling y'all.

Your gut feeling is probably not the best tool for making concern decisions. From CFO.com "APQC found that companies using advanced analytics and predictive algorithms for supply concatenation 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 concatenation, and you're simply relying on your past manufacture feel, with everything else equal, they're going to become paid nine days earlier than you. They are at present poised to respond more speedily to changing market needs and opportunities, while you're still waiting to go paid. It'southward no longer a good business strategy to base your concern 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. Brand certain that the lines of advice betwixt sales and finance are clear and open up.

While tools such as predictive algorithms and nevertheless more software may seem cost-prohibitive and time-consuming to implement, having your sales and finance team on the same page is relatively hands and cheaply implemented.  With open up lines of advice betwixt these ii core areas of your concern, y'all'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 bug bleed cash and build mistrust betwixt your visitor and your customers.

4. Rein in those extended terms.

You're not your clients' bank. Stop acting similar it. 30 day terms are ok.  Only with cyberspace 45, threescore, and even ninety day terms, your customers aren't feeling any sense of urgency in making certain they pay you lot in a timely manner. Your company needs greenbacks to grow and adjust concern strategies due to always irresolute marketplace forces.  By allowing your customers to put your company and your invoices on the back burner, you're giving upward the ability to accept advantage of opportunities that crave increased liquidity.

v. 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 ninety days (or more!), your customers are incentivized to prioritize your invoices. Offering early payment discounts likewise shows that you empathize your general contractor'due south slim profit margins and your role in helping your customers become more profitable.

6. Offer your customers easy payment options.

This may seem redundant, simply the easier y'all make it for your customers to pay you, the quicker your customers volition pay you.  Switching from paper checks to ACH or EFT payments is a dandy way to bring your cash conversion bike time down.  Implementing isn't expensive or difficult either!  Simply creating an ACH potency form and providing it to your customers with the initial invoice and other onboarding documents makes it a relatively piece of cake switch.  As far as enrolling your company to take electronic payments, there are a number of platforms out there that tin accommodate your visitor's needs.  In fact, the best place to first is with your accounting platform as most have native credit carte du jour/debit card and ACH processing options for very low cost.

Overcoming Long Cash Cycles in Manufacturing

By improving your greenbacks conversion wheel time, or cash to greenbacks bicycle fourth dimension, you're positioning your company to have greatly increased cash period.  The result being that both on newspaper and in the depository financial institution, you accept greater liquidity, fewer unsecured assets, and can minimize your business' own liabilities.  Better liquidity and shortened greenbacks conversion cycle times tin can make sure your business organisation is able to be agile both in strategy and procurement in a quickly changing globe.

Bibliography

Hayes, A. (2021, March 7). Cash Conversion Bicycle (CCC). https://www.investopedia.com/. https://world wide web.investopedia.com/terms/c/cashconversioncycle.asp

Wiggins, P. D. (2020, September 2). Metric of the Month: Greenbacks-to-Cash Cycle Time. cfo.com. https://www.cfo.com/cash-flow/2020/09/metric-of-the-month-cash-to-cash-cycle-fourth dimension/

Pricing & Availability

View pricing for ManoByte'southward sales enablement, partner enablement, marketing automation, and advanced web development solutions. We specialize in edifice automated systems to achieve alignment between marketing, direct & indirect sales, and operations for edifice products manufacturers.

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Source: https://www.manobyte.com/growth-strategy/improve-cash-conversion-cycle-time

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