How understanding the Cash Conversion Cycle can help companies to navigate the current Manufacturing crisis

Damien Bruckard, deputy director of trade and investment at the International Chamber of Commerce in Paris, paraphrased it most eloquently: “The collapse and subsequent surge in consumer demand during the pandemic has led to significant shortages of manufacturing components, order backlogs, delivery delays and a spike in transportation costs and consumer prices.” 

We arrive at a point in 2022, where sourcing materials is a significant challenge, materials are taking longer to get delivered and the costs of both the materials and their transportation are increasing. Throw in an energy crisis and a war on the European continent and it’s safe to say that these are unprecedented times for manufacturers! 

Certainly, some of the strategies deployed prior to the pandemic have had to change in response to a very different world post-Covid19. Smarter manufacturers are shifting their focus onto guaranteed supply lines rather than purely focussing on cost control; a move away from a ‘lean’ manufacturing model in order to be able to deal with spikes in demand and shortage of supply are just two examples of how manufacturers are having to react to ever-changing market conditions. 

Whatever the responses and strategies, one thing is for certain. All of these macro factors are having a massive impact on cashflow and the ability of manufacturing companies to fund their current order book let alone think about future growth. 

The Cash Conversion Cycle and why it is an important metric 

 Nowhere else can you visibly see the impact of longer manufacturing times, higher supplier costs and extended credit terms than in the Cash Conversion Cycle. It has now become a critical metric in managing cashflow in today’s more forward thinking manufacturing companies, particularly in a time where having access to cash is king.  So what is the Cash Conversion Cycle. Put simply, it is an accounting formula that determines the time it takes for your initial cash outlay and manufacturing processes to turn back into cash in your bank account. The CCC formula determines how efficient a company is at managing its working capital.  

How do you calculate it? 

The formula is a simple one. Understanding how you compare to others is a critical competitive tool:

DIO 

The average number of days you hold inventory before selling it.  

DSO 

The average number of days it takes for you to get payment following a sale. 

DPO 

The average number of days it takes for you to pay your suppliers  

Calculate your CCC here:

According to APQC, the leading global authority on business productivity, the average CCC for a manufacturing company should be 52 days, with the top performers on 33.2 days and the bottom on 74 days. 

Whilst the calculation of a Cash Conversion Cycle is quite complex and can involve multiple sub-calculations for each of the 3 main headings (DIO, DSO, DPO), this is a simplified, quick guide for demonstration purposes. It will give you a quick indication of how your company is faring versus global norms.

Clearly, the difference between the top and the bottom of this scale can be the difference between business success and business failure. The range demonstrates that companies at the bottom have to, on average, fund an additional 40 days of cash flow – more than one extra month in real-time. 

But that’s only part of the story…

Depending on your business model and its level of sophistication, there can be a large number of key stages where cash is required to keep everything on track. 

Clearly, companies that have a short conversion cycle can buy inventory (perform the process to finished goods in manufacturing), sell it, and receive cash from customers in less time.  But that’s not always possible. It may not even be sensible (for example, lean manufacturing is not a good strategy in times of supply chain uncertainty).  

What happens when exterior factors disrupt the manufacturing process and extend the Cash Conversion Cycle?

Do you have deep cash reserves or will you run out of cash?

How do you fund the increasing working capital gap? 

The good news is that now you know your CCC you know exactly what your potential working capital gap will be.  Also, you’ve more than likely made more favorable arrangements with your suppliers. You probably have blue chip debtors or a reliable source of customers. We can help you fund your own future, without relying on outdated or restrictive forms of funding.  

InvoiceFair is a funding platform where companies convert their own sales orders, WIP, invoices & even future revenues into upfront growth capital. Uniquely, we provide funding at every stage of the cash conversion cycle, offering a powerful mix of solutions to help companies grow. This allows them to take control, react to market opportunities, grow faster and create more value without restriction. In the past 5 years, we have advanced an impressive €1bn+ to growing UK & Irish companies. 

Solutions available include:

Sales Order Finance

Upfront Finance using approved sales orders 

Selective Invoice Finance

Choose the individual invoices you want to finance 

Innovative Invoice Discounting

Finance your entire Debtor Book plus a portion of your WIP 

Revenue-Based Finance

Leverage your future revenues and subscriptions today. 

Call our Business Development team on 003531 6632662 or email busdev@invoicefair.com for a bespoke consultation on how InvoiceFair could give your business the freedom to fund your own future and turn the uncertainty of the current manufacturing crisis into an opportunity to grow faster.