One of the critical elements of working capital management is the cash conversion cycle. It is a metric of the time it takes for a company to convert its investments to cash. Traditionally this analysis is done ad-hoc at a point in time - with companies often hiring financial consultants for the purpose.
Some of the critical questions that should bubble up during this analysis, apart from the raw number itself, are -
- How is the company doing relative to its peers in the specific industry segment?
- What is the composition of DSO, DPO, and DIO in the equation?
- Is AP & AR sufficiently automated?
- Is the company able to forecast cash with reasonable accuracy?
While we expect near real-time visibility from our devices, cars, banking transactions, websites, investment performance, etc. why do companies not expect the same when it comes to their cash conversion cycle? It’s surprising to find that finance teams in a majority of the mid-market companies do not have this information readily available. In this day and age, the technology has matured enough to allow the CFO to not only have this information at her fingertips but also be able to see the historical and future trends.
These metrics can and should be emitted as telemetry from the financial systems to improve the cash conversion cycle. Because the company is a living and breathing entity and its performance is not tied to the artificial quarterly/annual reports.
Would you like to discover how businesses like yourselves can achieve a decreased DSO and accelerated payments, generating over 10x ROI using Payference?
Book a meeting to schedule your free consultation today.
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