Retailers are accustomed to all sorts of cycles that impact their businesses. The sales cycle, which reflects the length of time from first contact with a prospect to a sale, is a crucial measurement of marketing effectiveness. Seasonal cycles anticipate the schedule for ordering and rotating stock throughout the year. Macroeconomic cycles expose businesses to periods of struggle or prosperity.
Yet, managers may be less familiar with another critical cycle: the cash conversion cycle, or CCC, which gauges the efficiency of a company’s cash management and often is a predictor of the performance of the retailer’s stock returns.
Efficiencies in CCC
The CCC measures the amount of time that cash is tied up in working capital. More specifically, it is the time between a company’s spending cash and receiving cash for each sale. It follows cash through an organization, beginning as inventory, transitioning to accounts payable, moving through sales and accounts receivable and then back into additional cash for the company. In the operating cycle, the CCC is the interval between the time when the company disburses cash to its suppliers (removing its debt to suppliers and decreasing cash flow by a given amount) and collects a given amount of cash from its customers (removing credit from customers and decreasing accounts receivable by that amount).
Investors use the CCC in conjunction with other measurements (e.g., days in inventory), to determine the overall health of a company and the competency of its inventory management, accounts receivable (AR) and accounts payable (AP) departments. It is an important gauge of efficiency.
While the cash conversion cycle is also impacted by investment and finance activities of the company, clearly an organization will want to shorten (lower) the CCC so that it can obtain the cash for its investment in inventory more quickly. An efficient CCC allows a business to remain ahead of competitors; to showcase a healthy company for potential customers and investors; and to spend more time on business-growth activities like sales and marketing.
Obtaining these kinds of efficiencies, however, proves difficult for some organizations, especially those AR/AP departments that still must deal with literal paperwork instead of digital purchasing and payment documentation. Many suppliers receive paper purchase orders (PO’s) and submit paper invoices. These documents must be managed by human hands and are subject to a wide array of errors and delays, from faulty manual entry of purchase and sales data into a digital system to invoices simply becoming buried in someone’s inbox while that individual tends to other business.
Most enterprises have some sort of ERP platform within their organization but the majority has not yet integrated that technology with available document management systems that digitally scan, store and retrieve all the paperwork associated with a purchase or sale.
Paperless ERP enablement
Paperless ERP also enables much, or all, of the AR/AP routine to be automated, both internally within the department and externally between the company and its supply and demand chain.
A paperless ERP solution can contribute to a more efficient cash conversion cycle in many ways.
First, it automatically captures and manages data and enables access to that data more quickly. When the organization uses Web-based technology to furnish a portal to suppliers, those vendors can submit their invoices directly to their customers electronically. The system can then update accounts receivable and payable automatically and route the correct digital documentation through workflow steps to the next person who needs to respond to it.