Overview

The retail trade data for December 2023 was released on 30 January 2023, showing a 2.7% fall from the previous month. The fall was no doubt influenced by the huge Black Friday and Cyber Monday sales boom in November as consumers sought bargains for non-essential items to cope with cost of living pressures.

The biggest fall was in household goods (-8.5%) followed by department stores (-8.1%).

The retail figures are a timely reminder of how vital cashflow is for a business. Cash is the main element of any business. A business needs a strong cash flow to cope with uncertainty. Of course, making sales is good for any business. But if the gap between the date you invoice your customer/client and the date they pay you is too long, your business may be in trouble.

Cash Conversion Cycle

This is where the cash conversion cycle (CCC) becomes a useful metric for your business. The CCC measures the time it takes to turn initial investments into cash from the products you make and services you provide. It looks at how well your business efficiently manages its working capital (eg. inventory, accounts receivable and accounts payable).

To calculate the CCC, you need to know the following:

• Days inventory outstanding (DIO) - the number of days it takes to sell your stock or convert your work in progress to finished goods and services.

• Days sales outstanding (DSO) - the number of days it takes to collect payment from your customers/clients.

• Days payable outstanding (DPO) - the number of days it takes to pay your suppliers.

These three components are calculated as follows:

• DIO = (average inventory/cost of goods sold) x 365
• DSO = (average accounts receivable/revenue) x 365
• DPO = (average accounts payable/cost of goods sold) x 365

To calculate your CCC, add DIO and DSO and subtract DPO:

CCC = DIO+DSO-DPO

The result reveals how many days it takes to convert inventory and sales into cash less the time it takes to pay suppliers The shorter the time, the healthier your business cashflow, liquidity and profitability will be.

Why Understanding Your CCC is Vital

The CCC is a great tool to help improve your cash flow and reduce financial stress.

Here are my three tips on ways to shorten your CCC:

1. Negotiate better terms with suppliers, such as longer payment terms, discounts for early payment, bulk orders and loyalty rewards.

2. Optimise inventory management - reduce excess and obsolete stock, adopt just-in-time ordering, and implement an inventory tracking system.

3. Fast track payment from customers/clients – consider offering incentives for early payment, sending invoices more regularly and providing online payment methods.