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Cash Conversion Cycle

The cash conversion cycle is the time it takes a company to convert its net operating assets into cash. This includes the time it takes to sell products and services, collect payments from customers, and pay suppliers. The length of the CCC can have a big impact on a company’s working capital requirements and its overall liquidity.

What Are the Main Cash Conversion Cycle Components?

The CCC looks unsurprisingly similar to invoice management at a business. That’s because both CCC and invoice processing directly affect and are affected by accounts payable. The full cycle includes the following four components:

  1. The production period, or the time it takes to produce goods and services
  2. The sales period, or the time it takes to sell products and services
  3. The receivables collection period, or the time it takes to collect payments from customers
  4. The payable payment period, or the time it takes to pay suppliers

When calculating the CCC, business managers can use this formula:

Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding

What Is the Importance of the Cash Conversion Cycle?

It measures the amount of time a company’s cash is tied up in its operating activities. The shorter the CCC, the faster a company can turn its inventory and net working capital into cash. This can be important for companies that need to finance their growth or cover short-term debts.

A company’s CCC can also give insight into its payable conversion period, which is the number of days it takes to pay suppliers. The shorter the payable conversion period, the better. It means the company is able to pay its suppliers sooner and has more cash available to finance other activities.

What Is the Connection Between the Cash Conversion Cycle and Working Capital?

Working capital is the difference between a company’s current assets and its current liabilities. It measures the liquidity of a company’s operations. A company’s working capital and financing needs are impacted by the length of its CCC. The longer the CCC, the more working capital the company needs. This is because the company needs to finance its inventory and accounts receivable for a longer period of time.

How Does the CCC Affect the Cash Flow Cycle?

The CCC impacts the cash flow cycle because it affects the company’s cash inflows and outflows. This, in turn, affects its cash flow statement. The CCC impacts the company’s cash inflows because it affects the receivables collection period. The longer the receivables collection period, the longer it takes for the company to collect payments from customers, and the less cash it will have flowing in.

The CCC impacts the company’s cash outflows because it affects the payable payment period. The longer the payable payment period, the longer it takes the company to pay its suppliers, and the more cash it will have flowing out. This can result from missed early payment opportunities or late fees.

How Does Accounts Receivable Automation Improve the CCC?

Accounts receivable automation is the use of technology to simplify the process of collecting payments from customers. It improves the CCC by speeding up the receivables collection period. This, in turn, shorterns the cash conversion period.

Those that are familiar with the workforce management space need no introduction to Monday.com and its powerful work OS tool. Monday.com recently moved to an automated accounts receivable (A/R) collection system, powered by Gaviti, to replace its outdated annual reporting methodology.

From Monday.com’s accounts receivables department:

With our business and sales growing exponentially, Gaviti has been a key tool in ensuring our DSO has not only stopped increasing but also shown improvements over a relatively short period of time. The ease of use combined with a highly responsive and helpful team… We have been able to quickly implement a comprehensive and versatile collections process.

When you stop to consider the broader, organizational benefits of automated A/R solutions, it’s easy to understand why Monday.com was so successful. The right A/R collection software can improve cash flow as well as the performance of key metrics – such as days sales outstanding (DSO) – within your organization.

Improve DSO Collection Processes

At its core, DSO collection is a cash flow problem. According to a U.S. Bank study, 82% of businesses fail due to poor cash flow management.

Part of this issue is attributable to the time-consuming processes inherent in manual collections. DSO collections and cash flow already vary from month to month. When you add the time spent managing spreadsheets across late payments, grace periods, and lines of credit, you have an untenable system where staff spends more time corralling reports than processing payments. And while you may not enjoy managing the nitty-gritty details of your business’s finances, your financial processes are ripe for optimization. Consider just a few ways that accounts receivable collection software can streamline your enterprise DSO:

  • Collect on accounts when they’re due with automated customer reminders
  • Create a single source of truth with a centralized A/R database that eliminates the need for tracking/compiling across different spreadsheets
  • Faster invoicing through the elimination of unnecessary payment delays
  • Standardize your process for consistent, repeatable collections every time
  • Streamline payment collection for clients, decreasing the odds of entry errors and making it more likely you’ll get paid on time

When you work to improve your accounts receivable collection, you’re working toward a healthy financial process where DSO stays low. But that’s not the only benefit of an A/R collection solution.

Stay Informed

5 Benefits of Automated Accounts Receivable Collection

In any discussion about the benefits of accounts receivable automation, it’s important to cover the broader benefits it provides:

  1. Better staff efficiency by reducing the manual hours required to perform collections tasks – all those hours you spend chasing invoices, calling clients, or writing follow-up emails add up.

  2. Ensure your data’s accuracy – real-time accurate data will prevent your company from making errors.

     

The benefits of the accounts receivable collection software are clear, and once you’ve deployed
automation,
you’ll have a hard time going back.

A/R Collections Best Practices

Although automated accounts receivable software brings a new dimension to your financial processes, the fundamentals of accounts receivable best practices remain the same. It’s a straightforward process that nevertheless tends to get bogged down by inefficiency. This is where automation software pays off.

Consider how you can leverage financial technology like this throughout your organization to improve key financial metrics. Technology is one option. Outsourcing accounts receivable collections to a service provider that can handle all the details for you is another. You have plenty of options, and now it’s just a matter of selecting which improvements will yield the best results for your enterprise.

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