The Cash Cycle

Cash is the life blood of any business, so it is important to get into the habit of controlling your cash cycle as soon as possible. The basic rules are: get paid by your customers as quickly as possible, and delay payment to suppliers and workers for as long as possible.

The quicker you can turn that cash around, the better your cash position, and the quicker you can begin to scale your business.

Why not use the recognised metrics which are widely accepted across all industry sectors, these are:

• Inventory days – how long it takes for your stock to be turned into cash.
• Work in progress days – how quickly your work in progress is turned into cash
• Accounts receivable (Debtor) days – how long it takes for your customers to pay.
• Accounts payable (Creditor) days – how long it takes for you to pay your suppliers.

It is important know how quickly you get paid, and how quickly you pay, to help with your cash flow management, and these metrics tell you that.

Good strategies are to ask for stage payments before or as you start work, state your terms of payment on presentation or before you invoice, pay your workers monthly rather than weekly, ask your suppliers for credit instead of paying on delivery.

Most suppliers will be happy to offer 30 days or payment at the end of the following month, some when pushed offer 60 days – clearly better than paying for what you buy immediately over the counter. This can depend on having a good credit rating.

The general idea is to keep stock, work in progress (WIP) and debtor days to a minimum and creditor days as high as possible. Make sure you get paid quickly for the work you do and pay those who supply you as late as possible. By doing this you keep the cash in your business as long as possible.

We help you by calculating, monitoring your Cash Days and telling you if they look out of step.

Cash Days are the four recognised metrics listed above combined into one number, to give you a
snapshot of how long it takes for the money to go through your business.

How is it calculated?

Cash days = Stock days plus WIP days, plus Debtor days minus Creditor days.

Cash Conversion Cycle – Questions to ask yourself regularly to keep your business on track:

• Are sales invoices being raised immediately?
• Are customers paying on or by their due date?
• Can you get your customers to pay you in advance or in stage payments?
• Can you agree deposits?
• Can you offer discounts to get paid quicker?
• Can you use direct debits & standing orders?
• Could you develop a subscription service for your business, like Amazon did with Prime?
• Can you agree longer terms with your suppliers?
• Are suppliers being paid on the last possible day?
• Can you speed up the production system or outsource it?

To find out more, why not contact us or book a meeting?