The Cash con-what?
The cash conversion cycle (CCC) is a metric that measures the time it takes for a business to convert its investments in inventory and other resources into cash from sales. It’s calculated with a simple formula, which takes into account the time it takes to:
Produce, hold and sell goods (Days Inventory),
Collect payment from customers (Days Receivables),
Pay suppliers (Days Payables).
In short: Cash Conversion Cycle = Days Inventory + Days Receivables — Days Payables
The goal is to minimize the CCC, i.e. the time it takes to convert investments into cash. In essence, you can reduce your CCC in three different ways:
Sell your inventory faster (Days Inventory)
Collect payment earlier (Days Receivables)
Pay suppliers later (Days Payables)
The 9th world wonder in business: negative CCC
Negative CCC has been called the 9th world wonder in business, enabling companies to grow without the need for external capital.
An example: In 2012, Ben Francis, a 19-year-old kid, launched GymShark, a sports clothing brand from his mum’s garage. He delivered pizza by day and sewed clothes by night using a screen printer and sewing machine. Fast forward 10 years, Gymshark is now worth £1.3 billion, having scaled revenue from from £9 million in 2015 to £440 million in 2022.
What was the secret ingredient that helped the company achieve this growth with minimal external funding? Its negative cash conversion cycle. In fact, Gymshark’s suppliers were financing its growth. On average, Gymshark was able to use:
108 days to sell an item in its inventory
19 days to collect money from its customers
163 days to pay back its suppliers
Cash conversion cycle: -36
Gymshark had cash on hand for 36 days for every item they sold, and used it to finance their growth. CCC is THE financial metric that drove their capital efficient success.
How to control CCC with your Payment Terms
Payment terms (and whether you and your customers adhere to them) are what determines your receivables and payables conversion times, and are therefore key to your control over the CCC.
Below are some things you can do on both ends to improve your payment terms:
Manage Your Receivables:
Offer early payment discounts to incentivize customers to pay invoices sooner.
Make sure payment terms are clearly communicated on invoices or through a separate agreement.
Set up automated payment reminders to avoid having to chase payments.
Negotiate custom payment terms with customers to better align with your cash flow needs.
Manage Your Payables:
Negotiate longer payment terms with suppliers to help conserve cash.
Make use of early payment discounts offered by suppliers for prompt payment.
Utilize purchase order financing or supplier credit lines to ensure you have the necessary funds to pay suppliers on time.
Consider consolidating suppliers to negotiate better payment terms.
Use Mimo to achieve negative CCC
While negotiating payment terms is a key way to unlock negative CCC, most of our customers are finding that, as a relatively small company, negotiating terms is very challenging.
With Mimo, you can now choose to delay supplier payments without interfering with supplier relationships. This allows you to increase your Days Payable, and achieve negative CCC. We would be happy to talk through how this can be used for your business in particular.
Don’t hesitate to reach out here.
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