How to Optimize your Cash Conversion Cycle
How to Optimize your Cash Conversion Cycle
Tactics I used to improve my CCC by more than 30%
It’s not often accounting folks get to wear a cape and be the hero of the story. There just aren’t many fairy tales where a Big 4 CPA turns business operator, revolutionizes the collection process, and gets a day named after them in their hometown.
But make no mistake, if you see the cash conversion cycle in action - I mean truly RIPPING - it’s nothing short of magic.
Maybe I shouldn’t say “see.” The CCC is something you have to “feel” to truly understand. I experienced its wonders first hand last year. I’m the CFO at a company where we got our Days Sales Outstanding (DSO) down from 55 days to 37 days in the course of a year. That’s an 18 day improvement, or 33%.
And through some shrewd negotiating, we got our Days Payable Outstanding (DPO) up from 35 days to 47.
And since we are a company that doesn’t produce any physical widgets, we had no inventory. So our Cash Conversion Cycle was now negative 10 days.
From Tactical Changes to Real Results
What’s the net of it all? As a cash-burning company, this allowed us to hire three more people over the course of 12 months. Those three people happened to be developers, who helped us get new products to market faster, and increase revenues.
OK, so let’s get tactical. How did we do it?
1. Adjusting Customer Agreements
First, we simply changed our “off the shelf” customer agreement. Every company has one. And it probably hasn’t been updated for… well, a long time.
Instead of 45 days, anyone new was handed a template that had 30-day payment terms penciled in. If they accepted the terms as they were, boom. We were already in the money by 15 days.
We had long accepted that 45 days was industry standard. It sounds dumb - but we let inertia hold us back. We finally said, damn the torpedoes. Let’s just try it and see who pushes back.
The result: Only 5 out of 20 new customers said something.
The lesson: Change it and see who complains. It’s never as loud as you think.