Cash-to-cash cycles are tied to corporate profitability. The longer the cash cycle, the more time corporate funds are occupied in working capital. A short cash-to-cash cycle signifies good financial flow and ensures cash is on hand for corporate expenditures.
According to Moody's Corporation, non-financial U.S. companies are sitting on $1.84 trillion in cash reserves. Today's unprecedented cash levels are related to recession anxieties, causing unrealistic reductions in capital investment and operating expenditures. Economic improvement and normalization, however, will result in a rapid depletion of cash reserves.
In his annual board letter, U.S. billionaire investor Warren Buffet advised Americans that now is a good time to make major investments despite the gloomy economic environment. Before embarking on major cash depletion, the time is right for evaluating the cash cycle process to ensure cash flow is not adversely affected when spending ramps up.
Cash cycles are effected by three major factors: accounts payable, inventory and accounts receivable. How fast a company gets paid, how it manages inventory and the money it expends all effect a company's cash position.
Improving cash-to-cash cycles, therefore, must include:
Proper inventory management Accounts receivable cycle reductionMaximized accounts payable times
Addressing these components requires having the right supply chain management strategies, technology and industry knowledge relevant to your company.
Inventory Management Strategies
The definition of cash-to-cash cycles varies by company. Some companies believe their cash cycles start at product delivery and end at cash. The cycles actually begin further up the supply chain at inventory procurement, when raw materials are purchased, and continue through to receiving cash from sold products. An accurate measurement of the inventory cycle should include raw materials, deposits and work in progress. The "old days" inventory calculation of "average finished goods inventory divided by cost of goods sold" is simply misleading. Calculations should include all inventories, raw material (including in-transit) consignment, fixed cost of production, etc.
Cash cycle management, therefore, begins at initial inventory procurement. With the worldwide economic labyrinth ever growing and with intensified competition, inventory procurement becomes a global venture. Efficiently managing inventory on a global basis often requires outsourced expertise as many companies do not fully comprehend or have the personnel to manage all aspects of it. A third party logistics consultant that understands the chemical industry and its protocols can support chemical shippers in this effort.
For example, consider a widely-distributed material such as TiO2 (titanium dioxide) that has more than 100 worldwide suppliers and a ongoing price surge in America. A 35 percent price differential exists among vendors, depending on quality and country of origin. When attempting to buy this product from supplier sources around the world, a chemical company can face a variety of overseas procurement nightmares from expensive letter of credits, logistics problems, quality control and reliability.
Strategic planning can avoid such problems during the procurement process. Many third-party logistics consultants offer experience in developing sound processes that ensure timely and efficient product delivery and procurement. Strategies may include purchasing product at FOB (freight on board) destinations, establishing foreign trade zone (FTZ) warehouses, arranging customs automated clearinghouse (ACH) and making payments - without letter of credits that tie up liquidity in working capital.