Growth sucks cash, as the saying goes – and many seemingly great businesses ‘grow themselves broke’. When you are scaling, the cash conversion cycle, and the control of it is absolutely vital. As soon as you begin to grow, any issues in your business will begin to grow too – and can become a blackhole for cash reserves.
To successfully scale your business, you need to develop a crystal clear understanding your cash conversion cycle.
The Cash Conversion Cycle measures the amount of time in days for a company to turn resources into cash – literally the time it takes for a dollar spent in your business to find its way around and back into your own pocket. There are three main components…
- The Production and Inventory cycle – where you ‘make’ products or services
- The Delivery Cycle – where you deliver them to your customer
- Billing and Payment – where you bill the customer and collect the cash.
The shorter your cash conversion cycle, the better you are at selling inventories and recovering cash from sales while paying suppliers.
Take action!
- Get your team together and map each of these processes out on a whiteboard. Note down which activities take place, and how long they take. You might be surprised!
- Brainstorm how you can speed these cycles up. Time can often be lost doing things ‘the way it’s always been done’, because the people involved have not understood the overall impact on the cash cycle.
- Engage and challenge your team. A few small tweaks often have a massive impact on cashflow.
There are four decisions you must get right to scale your business – People, Strategy, Execution and Cash.