Longer Cash-to-cash Cycles
Longer Cash-to-cash Cycles
Cash-to-cash cycles refer to the amount of time that it takes a business to pay its suppliers to when and get cash from its customers. The cash-to-cash cycle is used to decide the amount of cash required to fund ongoing operations. It is a key factor in assessing financial requirements. To calculate the cash-to-cash cycle, one adds the days of sales outstanding to the days of inventory on hand and then subtracting the total days of outstanding payables. Longer cash-to-cash cycles have to do with the slow movement that comes as a result of inefficient procedures and fragmented technical results. For a company to calculate its cash-to-cash cycle, they need numerous financial statements, including the cost of goods sold and revenue from the income statements, amount receivable, amount payable, inventory at the start and end of the time period, and the number of days for the period under review, that is 90 days a quarter and 365 days for a year (Guragai, Hutchison, & Farris, 2019). When an organization or its management pays expenses too fast, has too much inventory or takes an extended amount of time to gather outstanding receivable accounts, its lengthens its cash-to-cash cycle. A long cash-to-cash cycle means that it takes longer to generate cash which can cause insolvency for small companies.
I choose to discuss longer cash-to-cash cycle as a high-level operational issue as it is something I have experienced with an organization I worked with in the past. The organization had a quick inventory turnover which increased the cash conversion cycle. This long cash-to-cash cycle took a toll on the organization’s overall efficiency. The company struggled with the moving across information among staff members efficiently. The systems put in place were inefficient and did not sync with the organizational culture. There were gaps in communication channels which made it difficult for employees to communicate.
As regards two potential solutions to longer cash-to-cash cycles as a higher-level operation issue for companies breaking down the order-to cash process and getting lean are some viable options. The company should take a moment to break down and fix its order-to-cash process. The first step would be to assess every step in their invoice process. This will help them get rid of unnecessary or redundant steps which might slow down the payment cycle. If possible, the organization should make use of digital payment and invoicing to get extra time from the process (Ahsan, Islam, Litan, & Huang, 2020). Just like with any improvement initiative, it is difficult for organizations to start out unless they know where they stand. The first step towards improving the current cash-to-cash cycle is to compute exactly how long it takes an organization on average to recoup its investments in services and products. If it takes more than 30 days, the company may have a chance to boost its cash flow. Getting lean would be helpful as lean companies tend to ship faster, deliver flexibly, and work through the inventory of their finished goods. Inventory tends to be easier to liquidate and turn into cash. If the company can conduct a thorough mapping of the end-to-end processes and fix their gaps, then they can make their operations as lean as possible. Additionally, organizations can also partner with both external and internal suppliers to incorporate processes and make replenishment as efficient and fast as possible. However, it is worth noting that irrespective of how lean an organization gets, they should always remember to incorporate safety calculations as backorders and stock-outs can damage an organization’s reputation and customer service.
Ahsan, K. M., Islam, M. S., Litan, M. M., & Huang, X. (2020). Cash conversion cycle connection with industrial productivity and volume. Globus An International Journal of Management & IT, 12(1), 66-70.
Guragai, B., Hutchison, P. D., & Farris, M. T. (2019). Cash-to-cash (C2C) length: Insights on present and future profitability and liquidity. In Advances in Management Accounting. Emerald Publishing Limited.