If you’re looking to scale your e-commerce business, shortening your cash conversion cycle (CCC) can be an effective way to do it. Your cash conversion cycle is a telling measure of the health of your business and its financial standing, which is why having a shorter CCC as opposed to a longer one is ideal when it comes to growing your business.
In this article, we’ll take a closer look at how a shortened CCC can be beneficial to your e-commerce business, different ways you can go about shortening it, and platforms you can use to help you along the way.
What Is a Cash Conversion Cycle?
A cash conversion cycle (CCC) is a metric that allows businesses to measure how quickly it’s able to convert inventory into cash. It indicates how well a company is managing its working capital and liquidity. Having a shorter CCC is ideal since it shows that a company is efficiently managing its investments and generating higher returns.
On the flip side, a longer CCC can negatively impact a business’s growth since it shows that the company isn’t properly managing its investments. With a shorter CCC, e-commerce businesses have the available funds to invest more back into marketing, technology, and other areas that are important for business growth.
The Three Components of a Cash Conversion Cycle
A CCC is made up of three different elements that, when considered together, provide you with the formula you need to calculate your CCC and gauge the health of your company. The three elements are Days Inventory Outstanding (DIO), Day Sales Outstanding (DSO), and Days Payable Outstanding (DPO).
Before we look at the formula, let’s look at each of these three elements and why they’re each an important factor in your business’s CCC.
Days Inventory Outstanding (DIO)
DIO is a way for a company to measure the average number of days it takes to sell inventory. It’s an important metric for a company to evaluate its ability to turn inventory into cash. Like your overall CCC, a high DIO shows that it’s taking a company longer to move its inventory. You can calculate your DIO by dividing the average inventory balance by the cost of goods sold (COGS) over a period of time, and then multiplying that result by the number of days in the same period.
Day Sales Outstanding (DSO)
DSO looks at how long it takes a company to collect on payments from its customers for sales. This is calculated by dividing the total amount of accounts receivable by the average daily sales. Here, you’re looking for a low number, as that’s an indication that customers are paying on time. Your DSO result can be used to evaluate the effectiveness of your company’s credit and collection policies, and it can also show areas for improvement in your payment process.
Days Payable Outstanding (DPO)
Finally, your DPO measures the average time it takes your company to pay its suppliers for goods and services. This is typically used to examine a company’s liquidity and cash flow. A high DPO indicates that it takes a company longer to pay its suppliers, which might mean it’s at risk of defaulting on payments or incurring late fees.
How to Calculate Your Cash Conversion Cycle
In order to calculate your CCC, you first need the results of the three metrics mentioned above. Once you have that, the formula for calculating your business’s CCC looks like this:
CCC = DIO + DSO – DPO
The number you arrive at is the length of your CCC. Whether your CCC is high or low might be dependent on your industry. Some businesses might expect clients to pay invoices immediately upon receipt of a product or service, while others might have a 30, 60, or 90-day period for payments to be completed.
For example, e-commerce retail companies’ sales made directly to clients will likely have a shorter CCC, but if the same e-commerce company also sells on retailers or marketplaces with a 60-day payment term for items sold, that can increase the CCC.
How Can E-commerce Companies Improve Their Cash Conversion Cycle?
A shorter CCC doesn’t only show that a business is in good health, but it also means that a business has a greater ability to free up cash more quickly, enabling them to reinvest back into its business to fund projects and help them grow. That said, shortening your CCC can be tricky, but it’s still achievable with a few targeted strategies maintained over time. Here are some ways your e-commerce business can shorten its CCC.
Reduce Your Inventory Conversion Period
By implementing stronger inventory management practices, your business can reduce its CCC. This can be done by adopting just-in-time inventory management, ensuring you’re regularly managing excess inventory, optimizing your product mix, and relying on data to forecast demand in a bid to control inventory levels.
Optimize Your Accounts Receivable Conversion Period
By getting customers to pay outstanding invoices quicker, you’ll be able to shorten your accounts receivable cycle. You can do this by incentivizing customers for early payments, implementing automations in the invoicing and payment process, implementing a credit check process for new customers, or turning to invoice financing to get quicker access to funds from upaid invoices.
Extend Your Accounts Payable Conversion Period
There are many ways you can extend your accounts payable conversion period. For starters, you can begin by negotiating longer payment terms with your suppliers or taking advantage of early payment discounts. Aside from that, you can consider reviewing your payment terms with long-standing suppliers and implementing automations to streamline your accounts payable process.
Use Technology to Streamline Processes
There are tools available that can help you streamline your business, such as accounting software to help you put your payment and invoice processes on autopilot. Additionally, there are other automation platforms for e-commerce retail businesses that will allow you to improve your CCC. For example, Cymbio is a retail automation platform that helps you manage inventory when you work with retailers and marketplaces in addition to offering finance tools to help you get quick access to your profits.
Cymbio: Automate Accounts Receivable and Shorten Your Cash Conversion Cycle
Cymbio offers two solutions that can help you automate your accounts receivable process and gain access to cash quickly. Let’s take a look at each product in more detail.
Cymbio Finance is a product that allows multichannel sellers to get access to next-day payouts as opposed to waiting out a retailer’s payout period. Some retailers or marketplaces may have lengthy payout processes of up to 90 days, which can not only increase your CCC but also slow down your growth.
By turning to invoice financing with Cymbio Finance, you can get access to cash quickly, often within 24 hours, by getting access to cash quickly based on the value of your unpaid customer invoices. This can help you improve your cash flow and free up funds to reinvest in growth initiatives. Not only that, but as Cymbio Finance will take care of payment collection and reconciliation, you can cut down on time and resources related to managing your accounts receivable.
Additionally, the entire process is automated, granting you access to daily payouts with minimal intervention so that you can free up more time to focus on other aspects of your business.
Cymbio’s Automation Platform
With Cymbio’s automation platform, you can cut down on time and resources spent in other aspects of your business in addition to payment collection, enabling you to optimize all your e-commerce operations.
If you’re selling on multiple retailers or marketplaces or through dropship, you can work more efficiently by turning to one cohesive platform to manage everything from inventory syncing to order management and more. By automating otherwise manual tasks, you can free up more time to dedicate to growing your business. Additionally, with Cymbio’s analytics and reporting, you can get meaningful data about your orders and inventory, enabling you to make better decisions that can ultimately affect your CCC.
Finally, aside from enabling daily payouts and automating operations, Cymbio can help connect you with members of our 800+ retail partners, empowering you to scale your business even further.
Shorten Your CCC, Grow Your Business
Invoice financing is only one of the ways you can shorten your CCC. That said, other methods such as the ones we covered above can be effective, too, but often take a longer time to see results. With Cymbio Finance, you can begin shortening your CCC almost immediately, enabling you to put your money back to work so that you can focus on growing your business instead of collecting payments.