Mastering Your Cash Conversion Cycle The Key to Getting More Cash in Your Bank Account

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In every business, cash is king.  You’re going to go out of business without it, even if you’re profitable.  With it, you can hide a lot of sins.  But the truth is that very few business owners actively manage their cash.


Business owners usually enjoy producing and selling their products, but they often feel that managing cash is the bookkeeper’s job.  The big problem with this is that if you run out of cash, you’re pretty much out of business.  Your employees expect to get paid every Friday.  Your landlord expects to collect his rent at the beginning of the month.  Payroll taxes are due every month.  The list goes on and on.


So when business owners start to run low on cash, they quickly have to figure out how to get more.  This usually means collecting receivables, investing some personal money, running up credit cards, and asking for loans.


Once the cash balance is back to normal, everything is business as usual—at least until the next cash shortage.  The best way to solve cash flow problems once and for all is to speed up the complete sales-to-cash process.


Understanding the Sales-to-Cash Cycle


This is how the sales-to-cash cycle goes:

  • You advertise your product or service.
  • The customer places an order.
  • Your staff turns out your product.
  • The product is delivered.
  • The invoice is sent.
  • You collect the invoice.
  • The staff is paid.
  • Your vendors are paid.


Any cash that remains is called cash flow.  That’s the small amount of your collections that actually finds its way into your bank account.


This is how it works in a perfect world.  You collect the invoice before you have to pay your staff and vendors.  But as most business owners know, we don’t live in a perfect world, and the truth is that we often have to pay our staff, our vendors, and our overhead before we have a chance to collect anything.


And it gets worse!


Every business owner has certain fixed expenses (rent, loan interest, taxes, insurance, utilities) that have to be paid monthly, no matter when the cash is collected.  Accountants and bankers refer to these expenses as overhead expenses.  I joke that they are called overhead expenses because they are constantly hanging over your head demanding that you participate in a never-ending hunt for cash.


Why Improving the Sales-to-Cash Cycle Is Critical to Success


The reason so few businesses improve their business cycle is because it is really hard work.  You have to look at each step individually and find ways to improve them.  But the payoff can be big.


Amazon is a great example of a company that has almost perfected this.  Think about their business model.  Everybody pays with a credit card upfront, which Amazon will even keep on file for you.  This allows customers to place an order in one step.  They have several regional warehouses, making it easy to ship the product as soon as the next day.  This fine-tuning of their system has allowed Amazon to dominate the online retail world and easily compete with many brick-and-mortar stores.


So how will speeding up the sales process improve your cash flow?  Compare the following two companies.


  • If I buy from Company A, I place my order today and it’s delivered in a week.  I get an invoice at the end of the month and I pay 45-60 days later.
  • If I buy from Company B, I place the order today, pay for it today (or at least leave some down payment), and it ships tomorrow.  The invoice accompanies the order, and I pay the remaining balance (if any) in the same 45-60-days.


Company A receives the cash from my sale 90-100 days after the sale is made.  They have to maintain a large cash reserve to finance this amount of work-in-process and receivables.


Company B has purposely designed their sales-to-cash cycle so they receive at least half of their sales price before the product is delivered.  This one change dramatically increases their cash balance and allows them to make more sales without worrying about running out of cash.


But That Won’t Work in My Industry!


Until recently, I was one of those business owners who believed this.  I assumed I had to follow the traditional business design of most CPA firms, which are run like Company A above.  They bill when the work is completed and then wait to collect their receivables.  This leads to a constant struggle to collect enough cash to cover payroll and overhead.


A couple of years back, I decided to see if I could change this and made these sales-to-cash cycle improvements:


  • We started requiring that our clients consent to monthly billing via credit card or bank draft.  I only want to hold receivables when absolutely necessary.


  • I used to have a huge problem with collecting on tax return work.  If I let my client take the tax return without payment, I often did not get paid later—there’s simply no pain later.  I’ll get paid whenever they feel like paying me.  Now we simply tell the client, “You can’t have the tax return until you pay me.”  The IRS deadline helps make the payment of my return a priority.  We explain our new policy to every client at the beginning of the process so there are no misunderstandings.


  • Then I wanted to take it a step further.  Why can’t I get paid in advance?  Yes, this is almost unheard of in the tax business, which in many ways is just a commodity business.  I first told myself I couldn’t because no one else was.  Then I found a CPA in Oregon who was getting prepaid for a lot of his work.


So I put together a system that gives my clients an upfront discount for paying me monthly.  I then offset this discount by upselling an audit protection program.  The result:  My net income is basically the same, but I get the cash in advance.


  • All new clients are now required to leave at least a 50 percent down payment.  They don’t have a relationship with us, and we don’t know how promptly they will pay.  This helps weed out the deadbeats.  If they don’t want to pay us now, they probably won’t want to pay us later.


  • For our business clients, we created a variety of packages combining tax preparation, year-end financial statements, tax planning, QuickBooks support, and sales and profit consulting.  We designed them to provide what the clients really wanted—more sales, more profits, more cash in the bank, and less taxes paid—while getting what we really wanted, which was greater monthly income.  This allowed us to increase our average sales per client above the industry average.


Key Cash-Building Tip:  Don’t assume that just because all your competitors do it one way, you have to do it the same way.  Don’t be afraid to look at how you’re treating your customers and how you’re getting paid, and then look for ways to get paid at the time of the sale or even before the sale.  One of the key components of speeding up the sales-to-cash cycle is to just eliminate receivables as much as you can.