stages of development - International Business Growth Radio Network

SHOW & CHAPTER 17: THE CASH CONVERSION CYCLE - WILLIAM EASTMAN

2/5/2022

The cash conversion cycle makes it easier to assess the operational efficiency of a company in managing its resources. As it is true with other cash flow computations, the shorter the cash conversion cycle, the better the business is at selling its inventories and recovering money from these sales while paying vendors.

Show Objective
Given our previous shows on Financial Reporting, Break Even Analysis, and Activity Based Costing; build a spreadsheet for managing cash flow that will identify periods when the outflow of cash exceeds its inflow to determine how much cash on hand is required to meet all of your financial obligations on time.

EPISODE 81: Summary
The cash conversion cycle measures how efficiently a company’s management is handling its working capital. It shows the length of time between an entity’s purchase of inventory/materials and the receipts of cash from its accounts receivables. More precisely, it is put in practice by the management to envisage how long a company’s cash remains tied up in its operations.

Topics:

Identify all the sources of cash (what is coming in)
Identify all of the demands on cash (what is going out)
Creating a Cash Flow Spreadsheet (Balance Statement, Cash Flow Statement)

EPISODE 82: Money In - Money Out
Let's get this puppy rolling. None of this difficult, it is really a thought process to capture how money is flowing in and flowing out. You start with a Balance & Cash Flow Statements. Then add your Sales Forecast to build an accurate picture of the next 90 or 120 days.

Topics:
Sales Forecast

Forecast (Planned)
- Estimated individual units or hours sold over the period
- Average price per individual unit or hours over the period
Performance to Plan (Actual)
- Closed sales to date
- Actual vs Forecast

Production Forecast

Forecast (Planned)
- Total Schedule
- Schedule Sequence
- Average labor hours per day
Performance to Plan (Actual)
- Actual vs Planned Total
- Actual vs Planned Sequence
- Actual vs Planned labor hours per day

Cash Flow Forecast

Revenue Recognition (Inflow)
- AR by month
- AR average recognition time (AR Aging Report)
Cost of Goods Sold (Outflow)
- AP by month
- AP average payment time (AP Aging Report)
Velocity (Inflow/Outflow)
Monthly Cash/Credit Demands
- Forecast period = 2x Aging Report
- Isolate periods of negative COH (Cash On Hand)
- Credit - can you cover or forced to reduce marketing/sales?

EPISODE 83: Building Your Spreadsheet
Now that we have broken down the Balance & Cash Flow Statements, you need to create a spreadsheet where you can track the flow of dollars or pounds or euro's - or any currency. It is powerful for you to do this manually to really understand how this cycle takes place to identify trouble periods. I have found this the most useful way of doing it rather than having it built for you.

Topics:

Create a spreadsheet that covers all of the elements of cash in and cash out.
Using historical data for variable and constant (fixed) items, project the numbers over the next 3 months or longer - we match the sales cycle at a minimum.
Place close attention to those months when cash out exceeds cash in and especially when it cleans out all of your cash used for operations (Cash on Hand or COH).
If you didn't understand why a Line of Credit was essential - now you will.
Shift your Executive behavior at either delaying cash out to a better period or increasing the cash in to balance the equation.

EPISODE 84: Capacity, Sales, and Working Capital

Example Spreadsheet

Item	30 Days	60 Days	90 Days	120 Days	Total
Accounts Receivable	50,000	10,000	15,000	15,000	90,000
Accounts Payable	(40,000)	(35,000)	X	X	(75,000)
Subtotal	10,000	(25,000)	15,000	15,000	X
Fixed Costs	(3,000)	(3,000)	(3,000)	(3,000)	(12,000)
Net	7,000	(16,000)	12,000	12,000	X
COH	5,000	(16,000)	12,000	24,000	X
Line of Credit	$0	16,000	12,000	3,000	16,000