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Debt ReliefEffective Policies and Procedures - 4 Parts of the Complete Cash to Cash Cycle
by:
Chris Anderson
The Cash to Cash Cycle
Final of Series
Part One: http://www.bizmanualz.com/articles/01-05-05_inventory_procedures.html?src=../../ART78
Part Two: http://www.bizmanualz.com/articles/01-11-05_accounts_receivable.html?src=../../ART79
Part Three: http://www.bizmanualz.com/articles/01-18-05_Sales_Marketing.html?src=../../ART80
Part Four: http://www.bizmanualz.com/articles/01-25-05_Accounts_Payable.html?src=../../ART82
In the past four weeks, we've brought to light four key areas in which you can save $250,000 each -- for a total of $1,000,000. Point by point, we've shown you simply how cash flows through these areas, fashioning up the Cash to Cash Cycle.
And as we've seen, the cash cycle is beyond any doubt the single most important process to optimize for any business – from once
you spend money to once
you get money.
So now let's put it all together.
Cash to Cash Cycle Definition
By definition, the cash to cash cycle is a business quantitative relation
that shows the length time for which a institution must finance its own inventory. It measures the number of days between the initial cash outflow (when the institution pays its suppliers) to the ensuant cash flow
(Accounts Receivables).
Cash Conversion Cycle and Cash Flows
One way to express this is the length of time between the purchase of Inventory (raw materials, etc) and the collection of accounts Owed
created from the sale of your product -- as well called the cash conversion cycle.
Why is this most important? Because this is your cash flow and because…
Operations Assessment and Working Capital
Businesses live and die by the cash generated from operations. If your operations don’t create cash, then they consume it. A cash-consuming operation means that you have negative cash flow and you are living on finance
(debt or equity). But the Cash to Cash Cycle as well shows you the figure of working capital you have committed to your organization.
Just add the number of days of inventory to the number of days of assets
outstanding, and then calculate the number of days of liabilities
outstanding. The result is the number of days of working capital your organization has tied up in managing your supply chain. This can be quite a significant number - one not to overlook.
This can as well be expressed by the formula: stock days plus human days minus human days equals the cash-to-cash cycle.
So, for example, a institution that keeps its stock for on average 30 days, gets paid by its debtors on average inside
30 days and pays its creditors on average inside
30 days wish have a cash-to-cash cycle of 30 days.
Companies that obtain cash from their customers at the point of sale and that have their inventory under nice control wish have a short cash-to-cash cycle. A institution could even as have either a negative cycle or a cycle time of zero. For example, if a business’ assets
and liabilities
are command
in check at 30 days patch inventory runs at Just-In-Time (JIT) levels, then the cash cycle is zero – meaning that this institution is in nice shape with no working capital needs. And, of course, once
owed
days are less than liabilities
with JIT inventory, then the institution wish enjoy a positive cash-to-cash cycle – creating much cash on hand.
On the different hand, however, if a institution puts liabilities
down to 15 days and allows assets
to grow to 45 days, patch inventory remains at steady levels, the cash cycle wish be high. And. here, working capital wish be affected to compensate for inefficiencies.
Processes and Procedures Investments and Inefficiencies
Did you realize that working capital is the investment you are fashioning in the inefficiencies of your processes and procedures plus your investment in your suppliers’ and your customers’ inefficiencies too? In different words, if you do not monitor inventory, accounts receivable, sales and marketing and accounts collectable to ensure a healthy cash-to-cash cycle, then your working capital necessarily wish not maintain a strong cash flow. The process wish be out of control, and wish not be optimized to create the greatest figure of effectiveness for the company.
Policies and Procedures Savings
So now you can see the relationship between your cash flow, your working capital and your cash to cash cycle. In order to increase your cash flow, you need to increase the rate
of your cash to cash cycle by reducing the inefficiencies found in your processes, your suppliers’ processes and your customers’ processes. The result is a decrease in your working capital and an increase in your cash. And, as we've seen, this can be a significant number – again, one that you shouldn’t overlook.
Simply about the author:
Chris Anderson is presently
the managing director of Bizmanualz, Inc. and co-author of policies and procedures manuals, producing the layout, process design and implementation to increase performance.
To discover how to increase your business performance, visit: http://www.bizmanualz.com?src=../../ART82
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