Small Business Pam Watson Korbel
|Pam Watson Korbel is an expert on small business and revenue growth. She personally managed exponential growth in two companies: a software firm that grew by 500% in four years and a health care firm that grew by 1800% in eight years. In addition, she has been advising fast growth companies as a coach and consultant since 1996.|
Improving Your Cash Conversion Cycle
“Cash is king” in small business everyone will tell you that from your banker to your vice president of sales to your spouse and parents. Early in the business’ history, the most successful companies learn how to manage the cash conversion cycle to their advantage.
Essentially in this cycle you focus on methods to speed up cash coming in and slow down cash going out. Why is this important? Cash in the bank speaks volumes to advisors, bankers and investors. It also gives emotional comfort to the owners.
Most importantly, by building cash reserves, a company creates a mechanism to fund its own growth.
There are four basic phases that exist in the cash conversion cycle:
Through the cash conversion cycle, your goal is to focus on and shorten each phase. Therefore, to optimize cash, the owner/controller/CFO wants to shorten each phase by looking at opportunities for improvement such as:
Selling Cycle look at ways to reduce the number of days for:
Production and Inventory Cycle reduce the number of days by:
Delivery Cycle reduce the number of days by:
Billing and Payment Cycle increase the speed that cash comes in by:
Cash conversion not only provides cash to grow, it impacts the intangibles, such as your company productivity and reputation. Internally, employees get nervous about their employer when they see slow cash cycles within the company and they may look for a new job if they get too nervous. On the other hand, externally, prospects and clients get nervous when your sales, delivery and collection systems are too rigid. And your reputation also suffers when you produce a low-quality product because of cash constraints that in turn impact your customers’ cash conversion cycles.
Many people and organizations can assist you with systems to improve your cash conversion cycle. Consider contacting your banker, certified public accountant, financial advisor, business consultants and participating in classes through the small business development centers or local colleges and universities.
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