How Well are You Converting to Cash?

Cash is king, nothing new there. In times of economic disruption especially, there are some silent killers relative to cash that every business needs to be on the lookout for and mindful of the potential effects. When we talk about cash conversion, what that means is how well a business is converting inventory (for businesses that have it), and accounts receivable into cash. Do you know how many days on average it takes from the initial outflows for goods, services, payroll, etc. to convert that into positive cash flow? You need the baseline and to also understand what is happening underneath the service. And a critical disruptor to cash conversion we are seeing in the market right now is related to the lengthening of accounts receivable terms. Here is what to know and what to do about it:

Accounts receivable is getting stretched for a large number of businesses. We see this particularly from larger customers. Bottom line, in most cases, they have leverage. They write big checks and are material to the business. Understand how much leverage they really have? Are they highly profitable for you? Do they provide ordering visibility that allows you to forecast more accurately? Do you need to withhold further shipments until things are current? Understand the quality of the client overall and assess your response.

An often overlooked aspect of A/R management is a structured follow up process. Do you send regular statements and reminders? Automated ones might work, they might not, and for repeat offenders, a little extra care might be warranted. Many times, the squeaky wheel gets the grease, so stay on the radar. Also, go up the chain with the customer if needed. Especially in larger organizations there can be many layers between the buyer and who writes the checks. You may need to involve multiple parties.

Inventory terms in a general sense are not improving, as many suppliers are backed up given softening demand. So, the ability to stretch outlays up front is complicated. What can be done is a re-examination of how you are buying. Could you free up a little cash to help blunt the effects of cash tied up in A/R?

Understand that your lender may not just lend you more money. Lenders are concerned about macro-economic conditions. We are already seeing tightening in underwriting. Be proactive and have the conversation about the quality of your collateral, your plans to manage the next 12-24 months and have a financial story to tell them. Just be prepared that you likely need multiple levers and sources of cash to pull on, because lenders will see increasing trends as days sales outstanding as a yellow flag. Too many businesses rely too heavily on their lender for cash. An overall strategy is needed.

Forecast cash. This is essential. What do you have the cash to do? What kind of reserves do you have, or need? What is the impact of you average customer delaying payment by even three days? If you don’t know the answers to these questions, start today. Having visibility can illuminate problems ahead of time, and then playing with scenarios can guide actions to steady the course.

As we so often talk about, be proactive. Too many businesses take action too late in the game. Know where you stand, have multiple options in your toolkit, and execute. Getting stretched thin on cash is scary. It does not have to stay that way.