Cash Conversion Cycle: Get Paid Before You Pay.
First, the cash conversion cycle counts the days your money spends inside your business before it returns. In addition, this chapter shows how the gap between getting paid and paying suppliers can fund growth. For example, Amazon, Dell and Blanquident used it to grow. However, you will also meet Rathwood, a profitable Irish retailer that the same engine destroyed. Finally, you will work out your three numbers. You will also learn why a shorter cycle never fixes a bad price.
How the cash conversion cycle turns timing into money.
Chapter 6: The float: how to get paid before you pay
Supplier payment terms float: 37 days of free cash.
The supplier payment terms float is the cash you hold between customer payment and supplier bills. In the chapter's example, that window lasts thirty-seven days. Because it repeats with every batch, it grows with your sales while the next batch keeps selling.
Cash conversion cycle formula: three hands on a clock.
The cash conversion cycle formula is days inventory outstanding plus days sales outstanding, minus days payables outstanding. It tells you how many days your money spends inside your business. If the result is negative, you are running on other people's money.
Negative cash cycle small business: the Blanquident way.
A negative cash cycle small business collects from customers before it pays its suppliers. Blanquident, an activated charcoal toothpaste brand in Mexico, did this for years with no investors. Buyers paid within fifteen days, while suppliers waited sixty to ninety.
When the cash conversion cycle runs backwards.
Rathwood collapse Ireland: a profitable firm undone.
The Rathwood collapse Ireland case began when its main supplier, Mercer, went into administration. Rathwood then used customer deposits to pay creditors, which led to complaints and chargebacks. A retailer profitable for thirty years ended with debts close to twenty million euros.
Can small business get net 90 terms: the honest answer.
The honest answer to "can small business get net 90 terms" is usually no. Suppliers give sixty and ninety day terms to large, creditworthy buyers who order in volume. So aim for a shorter cycle than today, and know your number.
Calculate cash conversion cycle: your three numbers.
To calculate cash conversion cycle days, add days inventory and days sales, then subtract days payables. Use the last twelve months, the last three, or even one. Then work hardest on how long you wait to be paid.
Risks of spending customer deposits: six float traps.
The risks of spending customer deposits are real, because deposits are obligations, not revenue. The chapter lists six ways the float destroys a business, and deposits are one. Also, a shorter cycle cannot fix a bad price, since the float makes no money.
