Unlocking the Genius of Cash Conversion Cycle in the early days of scaling your D2C.
The CCC plays a significant role in maintaining healthy cash flow and ensuring financial stability, making it a critical aspect that should not be overlooked, especially during the early stages of scaling a brand. For those seeking investment, optimizing the CCC becomes even more essential, as it serves as tangible proof, among other factors, of your business model's viability to potential investors.
What is the Cash Conversion Cycle and why should I use it to my advantage?
The cash conversion cycle is more than just a financial metric; it is the beating heart of your brand. It measures how fast your business transforms its inventory into cash – the shorter, the better. Mastering the CCC is essential to fuel your daily operations, sustain inventory needs, and maintain overall financial stability.
Like the three legs of a tripod, the Cash Conversion Cycle stands on three crucial components:
Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO)
- Days in Inventory Outstanding (DIO) = Reduce
Average number of days it takes for your business to sell off its inventory
- Days sales outstanding (DSO) = Reduce
Average number of days it takes for your business to collect cash from goods sold.
- Days Payable Outstanding (DPO) = Extend
Average number of days it takes for your business to pay its suppliers
Strategies to Reinvent Your Cash Conversion Cycle
- Don’t settle: Negotiate Better Payment Terms with Suppliers
Reject the status quo of standard payment terms. Be bold and negotiate for more credit days to delay your payment time for purchase orders. Securing just 2-3 extra days per order can accumulate over time, increasing days payable over time.
- The game changer: Create Negative Accounts Receivables
Move a significant portion of your revenue by offering pre-orders, ensuring you get paid before actually paying your suppliers for the products. You generally receive upfront payment from customers, but embracing pre-orders can dramatically reduce days sales outstanding and keep your cash flow healthy.
- Simplify: Reduce Inventory
Inventory can be a significant cash drain. To achieve a negative CCC, aim to sell inventory before your purchase order invoice is due. Forge strong relationships with suppliers and convince them to produce and store inventory in their warehouses. This approach not only improves lead times but also simplifies your business model.
- Don't Pay Down Supplier Debts
Prominent brands don't pay down their supplier debts because it's borrower-friendly. This approach can save you from giving a personal guarantee, paying interest, and collateralizing assets. As you grow, it provides more flexibility.
Overall: Be the linchpin in your supply chain 😈
To improve CCC, you must have influence over your customers and suppliers. Treat your vendor like an investor, pitch them on your vision, plan for rapid growth, and develop a relationship with them.
It's not an easy task, but it's essential for scaling your brand, especially if you're bootstrapped. Before improving your cash position, it's crucial to have a solid grasp on your operations, particularly when it comes to managing stock movements. This is where Genie can help you cut through the chaos and stay on top of it all. By providing clear insights into your operations, Genie enables you to identify areas for optimization so you can better understand how these ultimately impact your cash conversion cycle.
