Myth:
As long as the business is making a profit everything will be fine.
Risk:
Profitable businesses still go broke when Suppliers are not paid through insufficient Cash Flow .
Cash Flow is often, although not always, managed by:
a) Demanding that Customers pay even earlier, putting new business at risk
b) Paying Suppliers even later, putting order fulfillment at risk
This risks kicking in a vicious cycle. Less revenue to pay suppliers for materials to fill orders = even fewer orders and delayed revenue from which to pay Suppliers etc.
Reality:
The Cash Conversion Cycle is the time to convert Raw Material to Cash Flow received from Customers. That’s usually longer than Suppliers will wait to be paid for it.
It only takes a few hours of work to actually make things, but it usually takes weeks to fulfill orders.
The gap must be covered by hard cash invested in Working Capital i.e. in inventory.
Bust the Myth:
Shrink Lead Times to just the time it takes to make things.
Link and synchronise the output of each process with the next.
Then, you can convert Raw Materials into Cash Flow faster than you need it to pay Suppliers.
Cash Flow is no longer a problem after that.
Redundant inventory is converted permanently into cash and reinvested elsewhere in the business.
The business is running on Zero or even Negative Working Capital.
An illustration of the Cash Conversion Cycle is featured in my LinkedIn profile.
Do you have any questions or comments?
