Cash-to-cash cycle time, also known as the cash conversion cycle (CCC), measures the amount of time it takes for a company to convert resources like inventory or investments in production into cash from sales. CCC is a critical measure of a business’s health and cash efficiency. If cash isn’t coming in quickly enough or is tied up in excess inventory, a company might struggle to pay its debt, make payroll, or invest in its future.
There are three variables that account for a company’s CCC: days inventory outstanding (DIO), days sales outstanding (DSO), and days payable outstanding (DPO). You can calculate CCC by subtracting DPO from the sum of DIO and DSO:
So how do companies measure up? APQC found that the top performers on this measure have a CCC of 33.2 days or less on average, while bottom performers take 74 days or longer to convert cash. (See graphic below.) Bottom performers on this measure will be more likely to see cash-flow problems, which is not an ideal situation in a climate where credit may be harder (and more expensive) to come by.
In two previous columns, I laid out a diverse array of tools and strategies for improving both DSO and DPO. Both can drive a CCC lower. I urged CFOs to balance speed, efficiency, and cash management strategies with the need to maintain healthy customer and supplier relationships. One of the key takeaways from both columns is that you need to think carefully about the broader ecosystem of the business as you work to improve these measures. This month, we’ll focus on the supply chain side of the equation to talk about how finance can partner with supply chain operations to drive a better CCC. As with DPO and DSO, any strategies you take to optimize a supply chain should be balanced with the risk of doing so.
One obvious strategy for improving CCC is to drive down your DIO by making inventory leaner. But a key lesson of COVID-19 for supply chains is that when you make your inventory too lean, your supply chain will break, rather than bend, when disruption hits. As a result of the pandemic, some companies are actually adding fat back into their supply chains to counter some of the shortages we saw last spring. Holding too much inventory can certainly drag down your CCC, but holding too little also carries risk in the form of stockouts and lost revenue opportunities.
In its supply chain planning research, APQC found that some of the most significant drivers of a better CCC provide opportunities for finance to do what it does best: partner with the business to provide better and more strategic decision-making. Below are three ways in which finance can act as a partner to the supply chain function for a better.
One of the most impactful practices for a better CCC is working to ensure that master data is accurate. Finance has a key role to play here. As the function that pays suppliers, finance is the most likely to know when supplier data like addresses or bank accounts have changed. APQC found that companies that ensure data accuracy to a very great extent have a significantly lower CCC (56 days) than organizations that only do so to some extent (71 days). If you find your company among the bottom performers on this measure, start by taking a look at your processes and practices around master supplier and customer data.
When finance brings analytically mature data and analysis to the table in a collaborative sales and operations planning process, supply chain leaders are empowered to make better decisions. APQC found that companies using advanced analytics and predictive algorithms for supply chain planning have an average CCC of 56 days, compared with 65 days for companies that make decisions based on instinct or anecdote.
Finance is uniquely positioned to leverage its expertise in scenario modeling and analysis to help supply chain leaders anticipate and plan for the future. Companies that model scenarios and perform sensitivity analysis to a significant extent have an average CCC of 49 days; those who do so only to some extent, 60 days.
Working to drive down CCC is imperative in an environment where cash is king, but this work cannot and should not happen in a vacuum. Each of the three practices above shows what’s possible when finance acts as a business partner by providing supply chain leaders with the resources and support they need. The result is not only a lower CCC but a stronger supply chain that can better withstand whatever disruptions tomorrow might bring.
Perry D. Wiggins, CPA, is CFO, secretary, and treasurer for APQC, a nonprofit benchmarking and best practices research organization based in Houston.