Indianapolis CPA Explains: Cash Conversion – How To Put More Cash In Your Account

It’s a well known principle in business that cash is king, because even if a business is making a profit, it can still go out of business the day cash dries up.  And this has proven to be the case for even the largest organizations.

So how do you increase the flow of cash in your small business so that this never happens?  And better yet, what can you do to gain a competitive advantage with your cash resources relative to most small businesses?

Well how it usually works is, small business owners typically perceive that managing cash is a responsibility that belongs to their bookkeeper – or even to their spouse.

But when cash shortages become an issue, it’s generally because these individuals have never developed a true understanding of the cash conversion cycle, and naturally do not have much control over it.

Because in fact, cash conversion is naturally the owner’s responsibility, and should not be separated from the overall planning activities of the business.


Working With The Sales-to-Cash Cycle

This is what the sales-to-cash cycle consists of:

  • You market your products/services
  • The customers place their order
  • Your employees deliver the products/services
  • An invoice is sent to the customer
  • The payment on the invoice is collected
  • You pay your employees and vendors

Whatever you have after this process is considered your “cash flow,” or the amount of cash that actually ends up in your account.

And in the best case scenario, your invoices are paid first before you have to turn around and pay your employees and vendors.  However, we know it often doesn’t turn out this way.  But instead, there are many times when small businesses are forced to pay their employees and vendors first.

And that’s not even the end of it!

Because business owners also have all types of fixed costs and overhead expenses – which are usually monthly – and necessary just to keep the lights on regardless of any sales being made.


Why Improving Your Sales-To-Cash Cycle Is Not Easy

One of the main reasons I stress that a business owner should maintain responsibility for his cash flow planning is that mastering the sales-to-order cycle takes serious work.

You must break the process down into each of its steps, and figure out how to make it work best for both you and your customers.  But it’s well worth the return on investment in time and effort when it’s done well.

So how can you accomplish this?

Consider for example two different companies.

  1. In the first company, you place an order today, and have the products or services delivered within a week’s time.  The business owner owner sends out an invoice at the end of the month, and payment is made between 30-60 days later.
  2. In the second company, you place an order and make your payment today (or a partial payment), and delivery is made the next day.  The invoice and order go hand in hand, and any balances not paid upfront are collected within the same 30 – 60 days.

As you can see, there’s a chance that the first company won’t collect it’s cash for up to 90 to 100 days after the initial sale.  And therefore, a significant cash reserve is necessary to cover the meantime.  And not to mention, the longer a balance goes unpaid, the more likely that that it will never be repaid.

But the second company developed their sales-to-cash cycle so that it specifically addresses this problem.  And by collecting a payment up front – say at least half – they are able to greatly increase their cash flow and continue to make sales without much concern for if they’ll be able to cover them.  So now they can really go after more business.

Would This Work In My Industry?

Until a few years ago, I had this very same question, because most CPA firms did and still do operate their firms similar to the first company.  They deliver the services first, bill their clients afterwards, and then wait until the check comes in later.  And I wasn’t sure I was going to be able to break out of this mode any time soon.

But then I decided to go forward and make an attempt to change, knowing that it would indeed be hard work but very worth the effort.

And in the process, my office team began to make the following improvements:

  • We decided to start using a monthly, fixed-fee billing plan – so this way maintain receivables only if we absolutely must
  • It used to be an issue that clients would come and get their taxes done, and then would take too long to make payment afterwards.  But now, the general requirement of my practice is that those returns are paid for before they go out the door – with few exceptions.
  • Then, to take an extra step, I decided to offer my clients a discount upfront for signing up for our monthly plans, and then I made up for this by upselling an additional package that provides monthly management reporting with key performance indicators.

So finally the result is that I make the same amount of profits as before with my clients, they receive even more value.  And as for operational purposes – with a monthly cash flow oriented model – I can now streamline much of the work that used to hold me back from focusing on the growth of my customers’ businesses as well as my own.

So the answer is, it’s definitely worth you looking for ways to improve your own sales-to-order cycle.

Many business owners may be hesitant at first, believing that it doesn’t apply to their business.  But truthfully, I got some of the ideas for how to run my business more efficiently from others – such as the manufacturing business.

And you might be surprised to know that there happen to be so many parallels between the way that different types of businesses are run. But having worked with so many over the years, I’ve noticed that when it comes to small businesses – in most cases – we’re not as different as we may think.

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