By definition, cash conversion cycle (CCC) also known as the net operating cycle (NOC) refers to a measure of the time taken in days by a company to change its investment into cash via sales (Zeidan and Shapir, 2017). According to Zeidan and Shapir (2017), the importance of CCC is its ability to show liquidity issues and existence of excessive inventory which can be interpreted as indicative of poor sales or services and products not wanted in the market. The CCC comprises of various components/activities ratios which involve inventory turnover, accounts payable, and account receivable. The ratios are important in showing the management efficiency in utilizing short-term liabilities and assets in generating money hence helps in the evaluation of how the company’s assets are used by the management. It tries to measure the time taken by every single net input dollar is connected with the production as well as the sale process before it is converted into the received cash. The CCC accounts for the time needed by the company to sell (inventory), collect receivables. It also accounts on how much time is the company has to clear/pay its bills while incurring no penalties.
The cash flows of a company under study can be increased by taking into place several strategies. Sending invoices promptly or right away as this ensures that the company receives its payments at the right time (Zeidan and Shapir, 2017). This is because the earlier/quicker the company sends out its invoices the earlier/faster the cash is received. In case the company is currently using a tedious invoicing process it can switch to a much better one such as cloud-based accounting software that allows for attractive and much easier creation of invoices (Zeidan and Shapir, 2017). Getting customers to pay invoices promptly is important in a bid to have the company increase its cash flow (Zeidan and Shapir, 2017). This is a difficult strategy to implement, but there are no shortages of practical ways of increasing the chances of the company being paid more quickly. These may include following up with invoice reminders by sending emails sometime before the invoice due date, giving customers incentives like giving discount offers to those who pay earlier, introducing a late payment penalty for those who pay late, and introducing invoice factoring where the unpaid invoices are sold by the company in exchange for immediate money/cash (Zeidan and Shapir, 2017). Increasing services or product prices forms another way of increasing cash flow. This should be done while considering factors such as what the company’s competitors charge for the same service or product, whether the inventory prices have increased, the manpower the company’s inventory services require, whether prices are greater compared to the time and resources invested in the production of the product, whether prices are too low, and whether the products come cheaply or with the desired value (Zeidan and Shapir, 2017).
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Expanding sales market increases the rate of cash flow (Zeidan and Shapir, 2017). This can be attained by considering adding new products or services, the creation of new marketing strategies, coming up with ways to encourage customers to purchase more of the company’s products or services, and getting hold of loyal customers by giving them discounts to make them happy. Customers can be made to buy more of the company products by bundle item selling where similar or related items are sold together and going a step further to advertise additional or related items. Finally, the company’s cash flow can be increased through the re-evaluation of operating expenses in a bid to reduce the company’s operating expenses (Zeidan and Shapir, 2017). This can be achieved through streamlining the company’s business process by focusing not only on cutting cost but also time, reducing unnecessary expenses, investing on more efficient equipment/machinery, bargaining for bulk inventory rates from the suppliers, and considering leasing out equipment to generate extra cash.
References
Zeidan, R., & Shapir, O. M. (2017). Cash conversion cycle and value-enhancing operations: Theory and evidence for a free lunch. Journal of Corporate Finance, 45, 203-219.
