Understanding the cash cycle

Your business is a constant cycle of invested, borrowed and earned cash. The longer your business waits on cash the weaker you are in the eyes of your clients, competitors, employees, lenders, and investors. The Cash Conversion Cycle (CCC) also know as the Cash Cycle is an important financial metric that gives you an indication of your financial strength.

What is the cash cycle?

The Cash Cycle is a financial metric that measures cash flow in relation to time. It is the time a business must finance the production of the goods and services it offers before it realizes revenue. Lower numbers are better. A short cash cycle means you are operating efficiently, minimizing unnecessary expenses, and producing income to cover expenses more efficiently. The cash cycle lengthens when you pay for labor, materials, or other cost ahead of being paid for your products and services. The cycle also lengthens when you are working in an industry where it is customary to carry Accounts Receivable (AR). Many business owners find themselves carrying AR for 30-60-90 days or longer. While the business waits to get paid the labor, material, and other financial demands of your business keep coming. Carrying AR means your business is essentially being the bank for its customers and doing that means you don’t have the cash to provide even more of your products and services for the marketplace that so desperately needs them.

The importance of the cash cycle

Longer cycle means less cash now, less cash means less strength

When you shorten your cash cycle you can negotiate volume or early pay discounts from vendors. A shorter cash cycle means that you operate your business from a position of financial strength i.e., more cash. With more cash you strengthen relationships with vendors, employees, creditors, and investors. When you shorten your cash cycle you are poised for growth. A shorter cash cycle is a key metric that makes you more attractive to stakeholders both inside and outside the business.

How to shorten the Cash Cycle and maximize your Return on Investment

  • Optimize inventory, tie up as little cash in inventory as possible
  • Send invoices as early as possible
  • Negotiate payment plans with vendors
  • Finance your Accounts Receivable with a trusted lender

If your business could benefit from shortening its Cash Cycle, call Financial Consulting Inc. today at 918-762-2271 we want to help you get the financing you need so your business can have Freedom to Grow!

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