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Effective Policies and Procedures: The Complete Cash to Cash Cycle
by: Chris Anderson
The Cash to Cash Cycle: Part Five of Series
Part One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Part Four: Accounts Payable
Part Five: Effective Policies and Procedures: The Complete Cash to Cash Cycle
Final in Cash to Cash Cycle Series
In the past four weeks, we’ve brought to light four key areas in which you can save $250,000 each — for a total
of $1,000,000. Point by point, we’ve shown you just how cash flows through these areas, making up the Cash
to Cash Cycle.
And as we’ve seen, the cash cycle is undoubtedly the single most important process to optimize for any
business – from when you spend money to when you get money.
So now let’s put it all together.
Cash to Cash Cycle Definition
By definition, the cash to cash cycle is a financial ratio that shows the length time for which a company must
finance its own inventory. It measures the number of days between the initial cash outflow (when the company
pays its suppliers) to the subsequent cash inflow (Accounts Receivable).
Cash Conversion Cycle and Cash Flows
One way to express this is the length of time between the purchase of Inventory (raw materials, etc) and the
collection of accounts Receivable created from the sale of your product — also called the cash conversion
cycle.
Why is this most important? Because this is your cash flow and because…
Operations Assessment and Working Capital
Businesses live and die by the cash generated from operations. If your operations don’t create cash, then they
consume it. A cash-consuming operation means that you have negative cash flow and you are living on
financing (debt or equity). But the Cash to Cash Cycle also shows you the amount of working capital you have
committed to your organization.
Just add the number of days of inventory to the number of days of receivables outstanding, and then subtract
the number of days of payables outstanding. The result is the number of days of working capital your
organization has tied up in managing your supply chain. This can be quite a significant number - one not to
overlook.
This can also be expressed by the formula: stock days plus debtor days minus creditor days equals the cash-
to-cash cycle.
So, for example, a company that keeps its stock for on average 30 days, gets paid by its debtors on average
within 30 days and pays its creditors on average within 30 days will have a cash-to-cash cycle of 30 days.
Companies that receive cash from their customers at the point of sale and that have their inventory under good
control will have a short cash-to-cash cycle. A company could even have either a negative cycle or a cycle time
of zero. For example, if a business’ receivables and payables are held in check at 30 days while inventory runs
at Just-In-Time (JIT) levels, then the cash cycle is zero – meaning that this company is in good shape with no
working capital needs. And, of course, when receivable days are less than payables with JIT inventory, then
the company will enjoy a positive cash-to-cash cycle – creating more cash on hand.
On the other hand, however, if a company puts payables down to 15 days and allows receivables to grow to 45
days, while inventory remains at steady levels, the cash cycle will be high. And. here, working capital will be
constrained to compensate for inefficiencies.
Processes and Procedures Investments
Did you realize that working capital is the investment you are making in the inefficiencies of your processes
and procedures plus your investment in your suppliers’ and your customers’ inefficiencies too? In other
words, if you do not monitor inventory, accounts receivable, sales and marketing and accounts payable to
ensure a healthy cash-to-cash cycle, then your working capital needs will not maintain a strong cash flow. The
process will be out of control, and will not be optimized to create the greatest amount of effectiveness for the
company.
Policies and Procedures Savings
So now you can see the relationship between your cash flow, your working capital and your cash to cash cycle.
In order to increase your cash flow, you need to increase the velocity of your cash to cash cycle by reducing the
inefficiencies found in your processes, your suppliers’ processes and your customers’ processes. The result
is a decrease in your working capital and an increase in your cash. And, as we’ve seen, this can be a
significant number – again, one that you shouldn’t overlook.
About the author:
Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and
procedures manuals, producing the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: Bizmanualz Policies, Procedures & Forms
Next Article
by: Chris Anderson
The Cash to Cash Cycle: Part Five of Series
Part One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Part Four: Accounts Payable
Part Five: Effective Policies and Procedures: The Complete Cash to Cash Cycle
Final in Cash to Cash Cycle Series
In the past four weeks, we’ve brought to light four key areas in which you can save $250,000 each — for a total
of $1,000,000. Point by point, we’ve shown you just how cash flows through these areas, making up the Cash
to Cash Cycle.
And as we’ve seen, the cash cycle is undoubtedly the single most important process to optimize for any
business – from when you spend money to when you get money.
So now let’s put it all together.
Cash to Cash Cycle Definition
By definition, the cash to cash cycle is a financial ratio that shows the length time for which a company must
finance its own inventory. It measures the number of days between the initial cash outflow (when the company
pays its suppliers) to the subsequent cash inflow (Accounts Receivable).
Cash Conversion Cycle and Cash Flows
One way to express this is the length of time between the purchase of Inventory (raw materials, etc) and the
collection of accounts Receivable created from the sale of your product — also called the cash conversion
cycle.
Why is this most important? Because this is your cash flow and because…
Operations Assessment and Working Capital
Businesses live and die by the cash generated from operations. If your operations don’t create cash, then they
consume it. A cash-consuming operation means that you have negative cash flow and you are living on
financing (debt or equity). But the Cash to Cash Cycle also shows you the amount of working capital you have
committed to your organization.
Just add the number of days of inventory to the number of days of receivables outstanding, and then subtract
the number of days of payables outstanding. The result is the number of days of working capital your
organization has tied up in managing your supply chain. This can be quite a significant number - one not to
overlook.
This can also be expressed by the formula: stock days plus debtor days minus creditor days equals the cash-
to-cash cycle.
So, for example, a company that keeps its stock for on average 30 days, gets paid by its debtors on average
within 30 days and pays its creditors on average within 30 days will have a cash-to-cash cycle of 30 days.
Companies that receive cash from their customers at the point of sale and that have their inventory under good
control will have a short cash-to-cash cycle. A company could even have either a negative cycle or a cycle time
of zero. For example, if a business’ receivables and payables are held in check at 30 days while inventory runs
at Just-In-Time (JIT) levels, then the cash cycle is zero – meaning that this company is in good shape with no
working capital needs. And, of course, when receivable days are less than payables with JIT inventory, then
the company will enjoy a positive cash-to-cash cycle – creating more cash on hand.
On the other hand, however, if a company puts payables down to 15 days and allows receivables to grow to 45
days, while inventory remains at steady levels, the cash cycle will be high. And. here, working capital will be
constrained to compensate for inefficiencies.
Processes and Procedures Investments
Did you realize that working capital is the investment you are making in the inefficiencies of your processes
and procedures plus your investment in your suppliers’ and your customers’ inefficiencies too? In other
words, if you do not monitor inventory, accounts receivable, sales and marketing and accounts payable to
ensure a healthy cash-to-cash cycle, then your working capital needs will not maintain a strong cash flow. The
process will be out of control, and will not be optimized to create the greatest amount of effectiveness for the
company.
Policies and Procedures Savings
So now you can see the relationship between your cash flow, your working capital and your cash to cash cycle.
In order to increase your cash flow, you need to increase the velocity of your cash to cash cycle by reducing the
inefficiencies found in your processes, your suppliers’ processes and your customers’ processes. The result
is a decrease in your working capital and an increase in your cash. And, as we’ve seen, this can be a
significant number – again, one that you shouldn’t overlook.
About the author:
Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and
procedures manuals, producing the layout, process design and implementation to increase performance.
To learn how to increase your business performance, visit: Bizmanualz Policies, Procedures & Forms
Next Article
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