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Create a Strong Cash Flow Cycle
Lori Supinie
Senseney Music
Agenda
• Define Cash Cycle
• Discuss Cash Cycle components
• Ways to strengthen Cash Cycle
Cash Cycle Defined
• Length of time needed to turn economic inputs/resources
into cash flows
• Economic inputs: Accounts Receivable, Inventory, and
Accounts Payable (working capital)
Why Analyze your Cash Cycle?
• Cash is king
• Operations are a cash pump
• Financial effectiveness – reducing inefficiencies (yours,
your suppliers, and your customers)
Components of Cash Flow Cycle: Ratios
• Accounts Receivable Outstanding in Days (A/R OD)
• Inventory Turnover (I/T)
• Accounts Payable Outstanding in Days (A/P OD)
Components of Cash Flow Cycle: Formula
A/R OD + I/T – A/P OD = Cash Flow Cycle (# Days)
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Accounts Receivable (average)
Sales (annual)
Inventory (average)
COGS (annual)
Accounts Payable (average)
Accounts Receivable Outstanding in Days:
• A/R / Sales X 365
• For example:
500,000 / 2,000,000 X 365 = 91 days
Inventory Turnover
• Average Inventory / COGS X 365
• For example:
500,000 / 1,200,000 X 365 = 152 days
Accounts Payable Outstanding in Days:
• A/P / COGS X 365
• For example:
200,000 / 1,200,000 X 365 = 61days
Cash Flow Cycle
A/R OD + I/T – A/P OD = Cash Flow Cycle
91 + 152 – 61 = 182 days
What’s a good number?
• It depends!
• Benchmarking is difficult; moving your own needle is not
• Some general observations:
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The more “retail” you are, the lower the number tends to be
The more “financing” you do, the higher the number tends to be
The more stores you have, the higher the number tends to be
Vendor financing results in a lower number
Ways to Lower Cash Cycle Number of Days
• Whole store approach
– Accounting
– Inventory Purchasing
– Sales & Marketing
Ways to Lower Cash Cycle Number of Days
• Accounting
– Credit & Collection policies (tighten terms, take action
earlier, offer early pay discounts)
– Bill immediately or align your statement cycle
– Reduce errors
Ways to Lower Cash Cycle Number of Days
• Inventory Purchasing
– Negotiate with vendors (schedule deliveries,
consignment, terms)
– Reduce errors
– Increase turns (balance between acquisition costs
of smaller quantity orders and carrying costs)
Ways to Lower Cash Cycle Number of Days
• Sales & Marketing
– Reduce customer service errors
– Better forecasting (Hope is not a plan!)
– Less in-house financing
– Sales and product training for staff
Conclusion & Cautions
• Importance of Strong Cash Cycle
• Don’t squeeze vendors
• Verify improvements
• Questions?
Lori Supinie
Senseney Music
[email protected]
316-262-1487
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