“Cash…is to a business as oxygen is to an individual,” says Warren Buffett. “Never thought about when it is present, the only thing in mind when it is absent.”
The old adage that “cash is king” is truer than ever. But handling cash effectively, with foresight, insight and top-down management awareness of the stakes involved can mean the difference between merely surviving and long-term, profitable viability. Unfortunately, many companies don’t know how to leverage and optimize their cash, working capital, free cash flow and the cash to cash cycle—and how those financial management tools are interconnected. Understanding and optimizing the “cash to cash” cycle is paramount, yet only one in three companies consider their cash to cash cycle important.
This is a costly mistake that can be fixed.
Some companies — including Honeywell and Toyota — have a real knowledge of the internal processes and importance of cash to cash and working capital management, but based on my years of experience, they are the minority. Dave Cote, Honeywell CEO, says that among those that do realize its importance, far too many top level executives “don’t really understand how to go after it.”
Cote’s point is underscored by J. Paul Dittmann, Ph.D. of The University of Tennessee’s Executive Director Global Supply Chain Institute:
“When the CFO at Whirlpool asked us if we could somehow use our supply chain to cut working capital in a major way, I was clueless. In fact, I’m embarrassed to say I couldn’t even define working capital. I was stunned when I discovered the huge impact working capital has on the firm’s overall financial health, cash flow, and ultimately shareholder value. And I was surprised and gratified when three years later we had taken $600 million out of working capital using supply chain projects.”
So what exactly is the cash to cash cycle?
The cash to cash cycle is defined as the period of time between when a company spends a dollar on purchases from a supplier until it becomes a dollar of revenue from the customer. The shorter that timeframe, the better. By reducing its cash to cash cycle, a company firms up its balance sheet, improves its cash flow, and cuts its working capital requirements.
The graphs below show how Honeywell and Toyota benefitted from optimizing the cash to cash cycle. Each aggressively managed their ten-year free cash flow performance as a result of reducing their cash to cash cycle. In both cases we see this process yielded benefits to both the shareholders and to the business, as cash generated could be used for:
- Increasing growth opportunities
- Expansions into adjacent and other industries
- Mergers & Acquisitions (M&A)
- Research and Development (R&D)
- Retiring debt
- Shareholder dividends
When it comes to the cash to cash cycle, everyone needs to be involved, from the CEO to the CFO, from the supply chain leader to the purchasing and logistics professional. The figure above shows that cash to cash is at the center of six vital areas of business, including Leadership, Business Strategy, and Operational Excellence.
The Fortenberry Cash to Cash Method consists of three main elements:
- Running the Business
- Optimizing the Supply Chain
- Building a Productivity Machine
These elements, and how they relate to working capital and cash to cash cycle times, are thoroughly explored in detail in the full white paper.
I’ve recently published a white paper whose mission is to underscore the importance of cash flow in your business. Here are a few of the key points I make:
- Aggressively managing the speed and agility of the cash to cash cycle by managing end-to-end cycle time is a key driver for cash performance.
- It all begins at the top. A company may have the processes and tools to manage through a cash or operational crisis, but if the leadership team is not actively engaged and/or is second-guessing the frontline managers’ abilities to execute the plan, then all could be lost very rapidly.
- Contrary to popular belief, inventory is located throughout the entire business, not just in a manufacturing or distribution center. By managing cycle time, a business brings together all of its processes — from customer service to delivery— in order to direct how its cash is used. The ideal business maintains no unnecessary inventory, responds to changes in the marketplace, and supplies the required products in a timely manner.
- Optimizing supply chain design is about positioning resources in ways that enhance profitability and working capital while producing shareholder value.
- SIOP (Sales Inventory & Operations Planning) is the single process that brings a business together to create a forward looking 12-to-18-month plan that aligns functions, makes decisions on how to optimize resources and how to achieve the goals of the business. SIOP is a planning process that is structured and disciplined to produce one process used to run the business.
The simple message is that your cash is a major asset that must be used effectively in order to make all aspects of your business run smoothly, reliably and profitably.
Industry experts and academics agree that understanding, optimizing and reducing your cash to cash cycle has a big reward. Handling cash effectively can mean the difference between merely surviving and long-term, profitable viability.
As one of the few people in the world with real experience and expertise on the cash to cash cycle, I have unique insights to share. I have helped many companies take control and transform their financial future and long-term viability, and can help you too.
- If you need expert guidance on your working capital needs and how to optimize your cash to cash cycle, contact me at: jay(at)jayfortenberry(dot)com.
- For the practitioner: Please note that there are subjects such as logistics, trade, quality, and sourcing or supplier development (and more) that I cover in my blog posts at www.jayfortenberry.com/blog