Cash Flow: Not Just For the CFO

Cash Flow: Not Just For the CFO

Often considered to be the domain of the CFO, cash flow is actually driven by sales, operations, supply chain and other departments in your organization. How we choose to run those departments can dramatically impact the speed with which cash flows into and out of the organization.

Looking over your entire business model to discover ways to improve the cash-to-cash cycle requires outside the box thinking, a team effort and a sound understanding of the stakeholders that will be impacted by change. Challenging what is possible and making no excuses can free up potentially millions of dollars in cash flow. How would you spend an extra couple million dollars?

Cash-to-Cash Cycle

One of the key measures I use to identify opportunities in Business Performance Improvement is the cash-to-cash cycle: the number of days it takes from when you spend a dollar on acquisition of materials or services to when you get it back from customers. The calculation is relatively simple: accounts receivable days outstanding, plus days of inventory minus days of accounts payable outstanding (for materials and services).

Cash-to-Cash = A/R days + Inventory Days – A/P days

(Note: CFO.University calls the Cash-to-Cash Cycle, Cash Velocity. This tool, the Cash Velocity Calculator, will help you analyze you investment in working capital. For direction on how to improve the cash you have tied up in your operations or supply chain contact Rick.)

There are some interesting behaviors in this model. For instance, in many companies the accounts payable industry terms run about 35 days on average, as do the accounts receivable terms. They offset each other, so the focus ends up on inventory. If the inventory turns are about four (which to many companies is good!), that means 90 days of cash is tied up in inventory and thus the cash-to-cash cycle is 90. My better clients have a total of less than 50 days.

I have recently measured this cycle in several companies where the result was over 150 days and in one case over 250 days. I hope their relationship with the bank is good. I’ve also seen cycles as short as 25 days and in one case it was actually negative, but they leaned hard on their suppliers with greatly extended terms. More on that later.

Who Drives the Cycle?

Sales plays a part depending on the terms they offer in order to make the sale, often extending terms to make a deal look more attractive to buyers. Unfortunately, this slows cash flow and can be costly to the company. Take a look at your sales contracts to see if payment can be sped up.

One of the big players in the cash-to-cash cycle is purchasing. Not only do they negotiate accounts payable terms, but they also drive the flow of inventory, often buying large amounts in an effort to get higher volume discounts.

Some purchasing departments will extend payable terms to help cash flow without realizing that they’re pressuring suppliers, especially small ones, to effectively finance their inventory. Some companies like GE will ask for terms beyond 100 days. Most banks won’t finance beyond 90 days, which makes it very difficult for smaller companies to survive. In addition, the cost of cash will somehow be wrapped into the price of the item or in the lack of willingness to go the extra mile, as in supplier partnerships. I’ve seen opportunities for significant materials costs reductions, as high as 10% and more, disappear because of payment terms pressure.

These purchasing practices also impact inventory turns, a measure that purchasing is often not held accountable for. World-class companies can achieve turns of eight and some of my best clients have turns over 12, meaning inventory days of 30. If accounts payable is also 30 days, there is no cash impact from materials/services acquisition, which makes for happy CFOs and happy banks.

Another department that can impact cash flow is engineering and product management. If companies carefully manage new product introduction and old product ramp-down, the number of items in inventory shrinks, inventory levels stay low, and cash is not consumed.

Earlier this month the Wall Street Journal ran a story about Tesla running low on cash as it ramps up production for the new Model 3 sedan. Not only are there capital costs related to production, but ramp-up for production is driving the need to stock up on parts, and Tesla is looking at debt or equity to finance it. My sense is that better materials and cash planning could minimize the need for financing.

More Than Just Efficiency

To move the needle on the cash-to-cash cycle, you need to do more than increase efficiency. That might save a few days in each component of the cycle, but to cut the cycle by half or even more requires disruptive thinking and innovation. Ideas such as supplier partnerships, effective use of payment discounts, product design for supply chain management (DFSCM), just in time inventory management, and just in time production can all greatly reduce the cash-to-cash cycle.

The Take-Away

Responsibility for the cash-to-cash cycle belongs to more people than just the CFO. While he/she might ultimately be accountable for the cash needs and sources for the company, product development, operations and supply chain executives can greatly impact the need for cash and speed the flow through the organization. Speed again becomes the number one priority, in this case, cash flow speed, driving high levels of performance and potentially saving companies from disaster.

Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ.

Become a Member today and get 30% off on-demand courses, tools and coaching!

For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest.

Follow us on Linkedin!