September 2, 2016

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Improving the Cash Conversion Cycle

Cash Conversion Cycle (CCC) is the measure of a business's ability to generate cash.  It has three factors: Days Sales Outstanding (DSO)- these are sales that haven't yet been paid; Days Payables Outstanding (DPO)- these are your bills that are due but not yet paid; and Days Inventory Outstanding (DIO).  

 

Your supply chain and customer service teams can play with DPO and DSO by working with suppliers and customers to get bills paid as late as possible and sales paid as soon as possible, but this is often just a one time event and has a small impact to overall cash beyond that event unless things are really awry.   Generally, these time frames settle around industry norms, like 30 or 45 days.  After an initial clean-up of DPO and DSO, the way to continually maximize cash is by focusing on turning inventory as quickly as possible.  

 

It has been said by many that "cash flow follows parts flow."  This is true.  In fact, not only can a reduction in inventory result in improved cash and working capital, but the focus on speed, and an actual reduction in inventory, is ultimately the single most important driver in improving service, quality, new product commercialization, project management, customer experience and, yes, even safety.  Focusing on increasing speed forces constant study and insight into how these KPIs interact, how labor is balanced with work, how work is prioritized, and how obstacles are removed from the work environment and processes.  

 

Ultimately, to get faster, one must simplify.  Simplification is a science.  Understanding how to simplify every business element, in addition to optimizing inventory, is a key skill every individual in an organization should have.  Every element of a business improves with simplification.

 

So, as the new saying goes, "cash flow follows process simplification".

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