The Cash Cycle – What is it? what is your Cycle? How can you improve it? 9


As the saying goes, Sales are Vanity, Profit is Sanity and Cash is King. The Cash Cycle also known as the Working Capital Cycle helps you to quickly understand how much cash you need to run your business.

Here is a great example from Steve Grice for an average business

Average time to collect payment from customers           60 days            plus..

Average days sales held in stock                                   25 days            less..

Average days taken to pay suppliers                             35 days            equals…

Cash cycle                                                50 days

This means that you need enough cash in your business to finance 50 days worth of sales. If your sales are £1,000,000, you will need cash of £136,900. In practice, your business will probably need more cash available than this to pay for rent, rates, wages etc. You may also get cash spikes at the quarter end if you pay VAT.

http://stevegrice.wordpress.com/2012/02/06/working-capital-cycle/

Here is a brilliant Cash Flow Improvement Tool from NAB http://oms.nab.com.au/media/10/power_of_one/CF.html

This model quickly and easily calculates your cash cycle but also shows the effect of making improvements.

Having discovered what the cashflow cycle is, what can you do to improve it? well that depends, assuming you have agreed the best possible terms with your suppliers, you need to find ways to speed up cash received from Customers, if your business Sells to other businesses the first thing to look at is Credit Management.

CIMA have produce a comprehensive guide http://www.cimaglobal.com/Documents/ImportedDocuments/cid_improving_cashflow_using_credit_mgm_Apr09.pdf.pdf

But Credit Management may not be enough on its own, perhaps Invoice Finance might help?

Invoice discounting is an excellent, cost-effective way for certain businesses to improve their cashflow position.

  • Invoice discounting is most suitable for businesses with good financial controls in place and a strong financial background.
  • Invoice Discounting is ideal if you have an annual turnover above £500,000
  • Invoice discounting is suitable for business with an established credit control department.
  • Invoice Discounting is suitable for a wide range of businesses including manufacturers, wholesalers, transport firms, employment agencies and providers of some business services.
  • Suitable businesses for invoice discounting are growing businesses because the level of funding grows in line with increasing sales.

For more details look at http://www.rbsif.co.uk/invoice-financing/invoice-discounting

If your business sells to end customers you might consider Card Processing Advances http://www.credit-card-processing-loans.co.uk/

You must be masterful. Managing cash flow is a skill and only a firm grip on the cash conversion process will yield
results.

steve@bicknells.net

9 comments

  1. Interesting article with good references.

    My own experience is that many start up companies are afraid of Cash Management because they perceive it to be complicated – I actually think it is an excellent way to understand their business profile.

  2. Hi Steve
    Thanks for the mention.
    There’s another old saying that I like – “A sale is a gift until it’s paid for.” Not enough businesses realise the cash implications of this.
    Regards
    Steve

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