The Cash Conversion Cycle
Accelerate how quickly cash flows through your business so growth generates cash instead of consuming it.
The Cash Conversion Cycle (CCC) measures how long it takes, after you spend a dollar on anything — rent, payroll, inventory, marketing — for that dollar to flow through your business model and back into your pocket. The goal is to shorten or even reverse the CCC so that growth generates cash instead of consuming it. The framework uses two one-page tools: Cash Acceleration Strategies (CASh) breaks down the CCC into four components (the sales cycle, the production/delivery cycle, the billing/payment cycle, and inventory cycle) and brainstorms improvements in three categories — shortening cycle times, eliminating mistakes, and changing the business model. The Power of One calculates the impact on cash of a one-percent or one-day change across seven financial levers: price, volume, cost of goods, operating expenses, accounts receivable days, accounts payable days, and inventory days.
- Growth sucks cash — this is the first law of entrepreneurial gravity
- If you want to be paid sooner, ask — most customers will agree if you simply ask
- Improving margins and profitability improves cash, as long as you are not funding management waste on the balance sheet
- Nothing ages a CEO faster than being short of cash
- Successful companies hold three to ten times more cash assets than average for their industries
- The faster you complete projects, the faster you get paid
- Calculate Your Current CCCWork with your CFO to calculate how many days it takes for a dollar spent to return as cash. Read the Harvard Business Review article 'How Fast Can Your Company Afford to Grow?' by Churchill and Mullins for the formulas. Calculate the amount of cash required to fund each additional day of CCC.
- Get Daily Cash ReportingHave your CFO provide a daily cash report detailing the cash that came in during the last 24 hours, the cash that flowed out, and a projection for the next 30 to 90 days. Chart cash against accounts receivable and accounts payable weekly. This keeps cash top-of-mind and provides real insight into the financial model.Pro tipObserving cash sources flowing in and out daily gives far more insight into your business than any monthly financial statement ever will.
- Break Down CCC into Four ComponentsUse the CASh tool to decompose your CCC into the sales cycle, production and delivery cycle, billing and payment cycle, and inventory cycle. Map how cash flows through each component and identify which components represent the biggest drag.
- Brainstorm Improvements in Three CategoriesFor each CCC component, brainstorm ways to shorten cycle times (speed up sales, production, invoicing, and collections), eliminate mistakes (invoicing errors, missed deadlines, incomplete orders), and change the business model (collect deposits up front, switch to subscriptions, get suppliers to fund inventory).Pro tipStop saying 'This is just the way it is in our industry.' Dell proved that even a hardware company could achieve a negative CCC.WarningNothing infuriates customers more than a mistake. Errors are the number-one reason customers pay slowly and drag down the processes you are trying to speed up.
- Use the Power of One to Model ImpactCalculate the benefit to cash if you make a one-percent or one-day improvement to each of the seven financial levers: price, volume, cost of goods sold, operating expenses, accounts receivable days, accounts payable days, and inventory days. This reveals which levers have the greatest impact for your specific business.
- Choose One Cash Initiative Per QuarterSelect one cash-improvement initiative every 90 days as one of your quarterly priorities. This creates steady, compounding improvement in cash flow without overwhelming the organization.Pro tipIf you improve your CCC by 30 days in a $30 million business, you free up roughly $2.5 million of cash that can be used to pay down credit, invest in growth, or serve as insurance for tough times.
When Michael Dell was growing his company rapidly in the mid-1990s, he ran out of cash — he was growing broke. CFO Tom Meredith calculated Dell's CCC at 63 days and then focused on one cash improvement initiative every 90 days. Over a decade, he drove the CCC to negative 21 days, meaning Dell received cash 21 days before spending it. As Dell grew faster, it generated cash instead of consuming it, eventually enabling the founder to contribute to taking the company private.