How Supply Chain Team Helps to Increase your Working Capital

Exciting info for CFO and CEO to increase your working capital requirement!

Cash to Cash Cycle : How Supply Chain Team Helps to Increase your Working Capital

In an economic context where profitability is essential, cash management is a major challenge for businesses. The cash conversion cycle (CCC), or cash to cash, is a key performance indicator that measures the time it takes for a business to convert its assets into cash.

A short CCC means that the business is able to generate positive cash flows quickly, which allows it to have more cash to invest, finance its growth, or repay its debts.

In this article, we will see how to reduce the cash conversion cycle by optimizing the management of purchases and stocks, as well as invoicing and customer receivables collection.

Methodology

C2C is measured in days and we want a low number, which indicates a fast cash flow. we can improve it by having less money tied up in inventory, by getting paid faster by customers and offering shorter payment terms by our customers and by getting long credit terms by our suppliers.

C2C Cycle Time = DIO + DSO - DPO

Days Inventory Outstanding (same as Inventory Days On Hand)

+ Days Sales Outstanding

- Days Payables Oustanding

DSO = Average Accounts Receivable / Annual Revenue x 365

DPO = Average Accounts Payable / Annual COGS x 365

Purchase and inventory management

Purchases and stocks are two key elements of the CCC. Indeed, the company must have a sufficient level of stock to meet the demand of its customers, without however investing too much capital in unsold stocks.

To reduce the CCC, the company can optimize its purchase management by negotiating longer payment terms with its suppliers. It can also implement just-in-time (JIT) supply systems that help to reduce stock levels.

With regard to inventory management, the company can adopt a proactive approach by anticipating the needs of its customers. It can also implement inventory management systems that track stock levels in real-time and trigger replenishments automatically.

Recently, I discovered the DDMRP as an impactful process to reduce C2C Cycle Time.

The impact of delivery times and customer promise

Delivery times and customer promises also have an impact on the CCC. Indeed, a satisfied customer is more likely to pay their invoices quickly.

To reduce the CCC, the company can improve its delivery times by optimizing its logistics processes. It can also implement order and delivery tracking systems that allow real-time communication with customers.

With regard to the customer promise, the company must ensure that the information communicated to customers is clear and accurate. It must also be able to meet its commitments.

Invoicing and customer receivables collection

Invoicing and customer receivables collection are the last steps of the CCC. Fast and efficient invoicing allows the company to generate positive cash flows quickly.

To reduce the CCC, the company can implement automated invoicing systems that allow invoices to be issued in real-time. It can also offer flexible payment options to its customers, such as payment at 30 or 60 days.

With regard to customer receivables collection, the company must put in place effective processes for tracking unpaid invoices. It can also call on collection agencies if necessary.

Conclusion : Shortening the Cycle

Reducing the cash conversion cycle is an achievable goal for businesses of all sizes. By optimizing the management of purchases and stocks, as well as invoicing and customer receivables collection, businesses can generate more cash flows and improve their profitability.

Here are some concrete examples of measures that can be taken to reduce the CCC:

* Optimize supplier payment terms: negotiate payment terms of 30, 45, or even 60 days in some cases.

* Implement a just-in-time inventory management system: reduce stock levels by ordering only the quantities needed to meet demand.

* Improve delivery times: optimize logistics processes, implement an order and delivery tracking system.

* create a complete pulled flow process and optimize your WIP inventory

* Make the customer promise more precise: communicate delivery times and payment terms clearly.

* Implement automated invoicing systems: issue invoices in real time, offer flexible payment options.

* Implement effective processes for tracking unpaid invoices: send automatic reminders, call on collection agencies if necessary.

By adopting these measures, businesses can reduce their CCC and improve their profitability.

I hope this is helpful. Let me know if you have any other questions.