Cash is king, and all business executives swear by it. Poor cash flow makes the daily workings of a company quite a challenge and a daunting task for business managers and executives. It affects your daily tasks and also your long-term business growth plans. Shortening the cash conversion cycle (CCC) is the only way to stop your company's cash crunch and avoid any roadblocks.
The cash conversion cycle shows how efficient your business is in converting business transactions into real money and is a primary key performance indicator (KPI) of a brand. How do you shorten this cycle? Read this blog to learn about some of the best-used techniques to shorten the cash conversion cycle that most business executives follow.
Why do you need to shorten your cash conversion cycle?
The cash conversion cycle is the time companies take to make a sale and reflect the same sale money on their bank accounts. This process is the conversion cycle, and it takes much longer when payments are stuck on the pipelines or the clients’ or vendors' ends. But cash is like the blood of the business that keeps it going. Shortening this conversion cycle will help you gain a healthy financial system and manage your payroll, budgeting and forecasting, and all other back office accounting work.
Top 8 tips to shorten your cash conversion cycle
Here are the top 8 tips from the industry experts to help with your CCC.
1. Upgrade your cash flow management
Keeping track of all your payments, incoming and outgoing, is a major part of the cash flow management process. Incoming cash is made from payments received from clients, vendors, asset sales, loans, and interest on idle cash in the bank. Outgoing cash consists of payrolls, invoice payments, daily operation expenses, and bill and interest payments to various parties.
The strategy and leadership must take a closer look at all of these to get a stronger hold on the cash flow management to shorten the cash conversion cycles and make cash from sales faster than before. Releasing payments from your side as soon you receive services and sending out invoices immediately after making a sale is essential to speed up the cycle.
2. Never extend credits
No matter how well you know a client or your personal relations with them, you should never extend your credit timelines for anyone. Keep it professional and demand payments exactly when it was agreed upon during the sale. Sending reminders to your clients at regular intervals to remind them of upcoming payments. If you extend credit for one client, it is sure to open up the floodgates, and many more of your clients and vendors will ask for such extensions, and your cash conversion will suffer in the process.
3. Restructure your Accounts Payable time periods
You can renegotiate with your vendors and service providers about restructuring your payment schedules to stabilize the the cash you have in hand. Though it is always good business to disburse payments as soon as you receive a service and helps builds good relations with partners, you can try negotiating if you have a cash crunch.
4. Efficiently manage your inventory
Turning over your sales inventory is a very effective way to shorten your cash conversion cycle. The faster you drive up sales and manage your inventory better, the more money comes into your banks and converts into an actual money-making business. You can even integrate CRM software into your system to keep track of your inventory in real-time and stay on top of your game. Do not keep inventory management for the last moment; pre-plan your steps with a good look at your business process overview.
5. Take help from your bank's treasury management
Your bank will help you manage your holdings better to get better cash liquidity, speed up your asset sale process, and help in amping up business. There are treasury management options that can help you in your cash collection process from clients and vendors alike. This will further help you assess your financial risks and take measures to mitigate them before they become a major hurdle for your business.
6. Improve your Accounts Receivable process
You can start asking for up-front payments and immediate release of funds when you are running low on cash. You can also use an automated AR system to fasten the process. This will also help with smoothening your supply chain system and getting cash into your bank accounts much faster than before. Do not negotiate with your clients on payment terms, and you can even start fines for making late payments or bounced checks. This will push them to pay on time and help in your CCC process.
7. Offer easy-to-use payment options
Business Insider reports say that companies that use digital payments cut down costs by 81% and get more than 73% faster payment processing cycle. This is mostly because your clients do not have to travel to you to collect invoices and process payments physically. This work gets done remotely when you keep an electronic and easy-to-use payment method handy.
You can also automate your AP process with the latest software integration and best technology selection. This will automate the whole invoice processing and payment collection process. That is why more than44% of businesses are already looking to automate their whole AP system.
8. Re-evaluate your order to payment cycle
Many businesses have multiple layers of the technical processes for converting sales in money. Like invoice generating, clearing them with authorities, and verifying them with multiple departments, these might be redundant and slow down your overall cash cycle. You need to reevaluate which processes can be done without and omit those steps to get the cash rolling faster.
Parting thoughts
At KriyaGo, our team of accounting experts provides the best strategies to speed up the cash conversion cycle process. We work with an experienced set of people who have helped many small businesses in improving their financial health and increasing the cash flow in their banks. Our outsourced accounting services will not let you sweat over tedious back office accounting work and will help your business thrive amidst all odds.
Talk to us to find out how we work and how our accounting team can help you.
