Bringing Value to The Table... Issue 11.18.22
Fernando Lopez
CHIEF FINANCIAL OFFICER AND OPERATIONS | GLOBAL LEADER specializing in forward-thinking Finance, Operations and leading People to transform into excellence. Building companies to thrive even through stormy weather.
We all know that cash has become more expensive and will become more expensive in the future. Today we will talk about Cash Conversion -my intention is for you to share this information to your direct reports or key players in your team. When a group of individuals understand this cycle, they operate at a different level. Lets get started.
For example, whether producing goods or delivering services your business starts with 200kusd from which you buy materials -and received them right away- and 45 days later you produced or delivered your product or service, then you invoice your customer and after 30 days you collect the money. The total days elapsed in this process is 75 days (65 + 30), in this case the Assets conversion cycle is 95 days.
On the other hand, you received the invoice of the material received and you pay it 35 days later, therefore your Payables conversion cycle is 35 days. ???
When you take your Assets conversion days and deduct your Payables conversion days, you get The Cash Conversion cycle, in this case the Cash Conversion Cycle is 65 days. In other words, you have to have enough funds to satisfy the needs and obligations of your business for 65 days out of your own pocket!
The larger the cycle the higher the risk! The larger the cycle the longer it takes to recover your cash. I know this is obvious but believe me, there are many companies out there that don’t know this or worst they may know it but not apply it!
That is why, it is extremely important to find ways to optimize each cycle and reduce the asset cycle as much as possible and extend Payables cycle as operationally possible.
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I know, you may have your own opinion however you would agree with me that we all need to keep an eye on the cash!