Understanding the Cash Conversion Cycle
For an SME to grow profitably it must come to grips with two key factors on its Balance Sheet. The first is Working Capital and the second is the Cash Conversion Cycle (CCC).
With an understanding of the two you can identify your business’s true needs and decide which funding options are best to achieve positive cash flow, leading to improved profitability and market share.
Working Capital is the difference between a business’s current assets and its current liabilities. If positive, it allows a business to purchase or make the products it sells to generate revenue and profits.
Working Capital is often confused with the amount of cash needed to run the business at a point in time. However, this isn’t the case. Working Capital is a snapshot of a company’s current financial situation and its short-term liquidity.
It is not a true measure of how much cash is available to pay for required stock or increase in production. For this SMEs need to look at the Cash Conversion Cycle.
Cash Conversion Cycle
The Cash Conversion Cycle is a calculation that measures how many days it takes for a business to convert stock and other resources into cash sales.
The CCC clock starts ticking from the time raw material or stock is purchased and continues through manufacturing or shipping and the period that the product sits on the shelf of the customer.
Once sold, the amount of time it takes for the customer to pay for the goods adds to the days that crucial cash is tied up. All these aspects can affect the length of the CCC.
A short CCC shows the business has a positive cash cycle and is doing a good job of collecting on accounts receivable. If stock sits on the shelf or too many customers fail to pay their invoices on time an SME faces the following scenarios:
- Insufficient cash to fund new sales and maintain current obligations, like wages and other fixed costs
- ‘Rationing’ of the cash to meet some costs whilst neglecting statutory payments or the funding of any business expansion.
However, there is a solution at hand if an SME is struggling with cash flow – Invoice Financing.
Tradeplus24’s Line of Credit facility allows an SME to shorten its CCC, thereby releasing cash tied up in invoices. This frees up management to pursue new orders and win new business.
SMEs can therefore extend longer credit periods to customers, which in itself has the ability to increase sales, ultimately securing the ongoing viability and profitability of the business for its owners.
Tradeplus24 offers a unique solution for SMEs in Australia. We provide a line of credit working in harmony with your software. Secure, flexible credit with limited admin. Get in touch today firstname.lastname@example.org.