May 18, 2024
Cash and Cash Equivalents

5 Tips to Reduce Your Cash Conversion Cycle

When you shorten your cash flow conversion time, you improve liquidity. You can then use this cash to pay bills on time, increase staffing, invest in research and development, or expand into new markets. These are just some of the uses that make strong cash flow an important metric for determining the health and potential longevity of businesses. The trick is knowing how to reduce cash conversion cycle times while still preserving good relationships with your customers.

What Is a Cash Conversion Cycle?

The CCC metric determines the number of days it takes for a company to convert its inventory and other business resources into cash in hand. Accounts payable teams also refer to this as the net operating cash cycle or just “the cash cycle.”

Companies that operate efficiently tend to have lower CCCs. When businesses waste resources and the accounts receivable departments drag their feet on securing payments, they tend to experience longer CCCs.

CCC can also vary across industries, company sizes, and business models. Consider these factors before determining where your CCC ranks on a scale of terrible to ideal.

What Can Companies Do To Improve Cash Conversion Cycle Times?

Knowing how to reduce the cash conversion cycle can put thousands back into the pockets of your business. Imagine not needing to borrow money to cushion yourself while customers scrape their invoice payments together. Envision the opportunities you can claim more quickly with cash on hand. Use these best practices to realize those goals:

1. Invest in Real-Time Analytics

Your cash flow cycle can change frequently over the course of the quarter. In fact, the numbers might change drastically in the week before and after payment deadlines. Real-time analytics provides accurate and timely information to help you make better decisions for the company. Use this data to make ongoing adjustments to your accounts receivable plan.

2. Encourage Earlier Payments

Some companies focus heavily on punishing customers for paying late, but they provide no incentives for paying early. Most people respond better to positive enforcement, so think of ways to encourage customers to pay in full and on-time:

  • If you start to run short on cash, consider temporary discounts for early payments.
  • Promise faster delivery for customers who pay their invoices in full and on time.
  • Provide better credit terms for customers who consistently pay in full and on time.

3. Speed Up the Delivery Time

Whenever possible, make faster deliveries more than just a perk for on-time payments. The sooner you get your inventory out of the warehouse and into the hands of your customers, the sooner you get paid. Faster delivery could also improve customer relationships and cause them to move your company further up on their lists of priorities.

4. Make It Easier To Pay

Do your clients use a clunky payment processing system? Do they need to visit your office in person or pay extra to send a cashier’s check? Consider offering multiple payment options. You could also make it possible for clients to pick a payment date in the month that works best for them. This makes it easier for them to sync your payment with their receivables cycles.

5. Simplify Your Invoices

Old invoices are as stodgy and inefficient as old payment methods. Work with your accounts receivable team to determine what information needs to be included. Then, design an invoice that includes only this information in a way clients find easy to follow and understand. This could drastically reduce processing and payment times.

What Role Does Automation Play in CCC Improvement?

When shortening your payables conversion period, automation is your best tool. Automation reduces human error, boosts morale in the accounts payable department and allows workers to focus on company-wide strategizing and one-on-one invoice conversion plans. This can do wonders to increase your bottom line.

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