Cash is King! That much has always been, and will always be, a truism. The amount of cash you have will determine whether your business grows or declines and whether it lives or dies. So managing the time of the cash cycle is a mandatory business process.
Many people may have the view that Finance is solely, or predominantly, responsible for cash management. But the reality is that Supply Chain has a leading role in determining the cash position of any company.
Let’s explore what Time to Cash or the Cash Cycle is, what Supply Chain’s role is, and what actions you can take to ensure there is enough cash to keep your business afloat.
What is the Cash Cycle or Time to Cash?
Time to Cash is synonymous with the “Cash Cycle”, “Cash to Cash Cycle”, “Cash Conversion Cycle” or “Time Cash”.
Crudely put the Cash cycle represents the amount of time it takes between the outlay of cash to cover expenses needed to enable the provision of products or services to the time until the inflow of cash from customers who have purchased or consumed those same products or services.
Investopedia defines the Cash Conversion Cycle as “a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.”
Accounting Tools defines the Cash to Cash Cycle as “the time period between when a business pays cash to its suppliers for inventory and receives cash from its customers. The formula is:
Days inventory on hand + Days sales outstanding – Days payables outstanding= Cash to cash days.”
Techtarget.com defines the Order to Cash cycle as “a set of business processes that involve receiving and fulfilling customer requests for goods or services. The O2C cycle starts when a customer makes a purchase and runs through the company’s entire order processing system.”
Whichever name you choose to put on this cash management metric and process, the end result is the same. The number of days of inventory plus days sales outstanding net of accounts payable days is the cash cycle.
Supply Chain Leadership in Cash Cycle Management
The Cash Cycle formula says it all in terms of Supply Chain’s preeminent role in Cash Cycle management:
- Days of Inventory
- Days of Sales Outstanding
- Days of Accounts Payables Outstanding
Finance certainly manages the accounting, tracking and reporting for cash management. And Finance very often takes the lead in working to drive cash levels. For instance I once worked with an exceptional CFO how demonstrated incredible leadership in turning the company’s cash flow from negative to positive.
But Finance does not have the functional responsibility for all of the processes that determine the rate at which cash flows out of the company and into the company. We, by no means intend to disparage Finance. But Finance does not typically run the operations of the company.
However Supply Chain directly impacts cash levels with every single thing that this functional organization does, each and every day. Let’s take a look at what these defining impacts are:
Days of Inventory Outstanding
Supply Chain directly determines the amount of inventory that is being carried by a company.
It starts with the selecting of suppliers and sourcing of materials. There are transit times, incoterms (eg. FOB), supplier payment terms minimum order quantities (MOQs), lead times, single or dual sourcing, pricing, supplier order fulfillment processes (eg. supplier managed inventory or just in time), quality issue resolution mechanisms, safety stocks and all other parameters and terms and conditions. These impact the rate at which inventory flows into your company and cash flows out.
Manufacturing cycle times, warehouse and distribution cycle times, production scheduling, ERP regeneration cycle frequency, customer order fulfillment times, and regulate the speed at which inventory stays in and flows through your organization.
And finally order management processes including scheduling, customer delivery and logistics, and ownership transfer points all determine the rate at which inventory leaves your company.
Days Sales Outstanding
While sales terms and the collection of Accounts Receivable is predominantly the domain of the Finance and Sales teams, the amount of A/R is certainly influenced by Supply Chain.
In many businesses the customer is only billed when the goods are delivered or shipped. And control of shipping and delivery is the purview of Supply Chain. Only at that point can an invoice be issued and then the clock starts ticking until cash payment is received from the customer.
Accounts Payable Days Outstanding
Accounts payable terms are defined by Supply Chain and Procurement through negotiations with every single supplier. This also includes definition of when the company takes ownership of the goods and when the customer can be invoiced.
On top of that there can be other factors influencing how much of those supplier invoices are paid and when. There may be discounts for early payment. There may be payment schedules, often dictated by Finance, such that suppliers are only paid at the end of a month or end of a week for instance. These conditions can either lengthen or shorten the number of A/P days.
Cash Flow Management Due Diligence
If you do not actively manage the cash flow and cash cycle of your business you can find yourself in trouble very quickly.
If you don’t have enough cash to pay your suppliers, your employees, or your other expenses, you can go out of business rather quickly.
On the other hand if you can generate positive cash flow you can fund and fuel growth at an accelerated pace.
The principle is simple: create positive cash flow. Keep your Inventory Days and A/R days low and keep your A/P days relatively higher. If you can get paid by your customers faster than you have to pay your suppliers, combined with high turning inventory, you can generate cash and drive highly improved returns on investment (ROI).
When all is said and done the health of your cash cycle management depends on leadership at all levels from Supply Chain.
Long gone are the days when Supply Chain was merely considered a back office function. Supply Chain is at the forefront of determining whether a company will succeed.
And that includes Supply Chain’s preeminent role in leading cash cycle management!