If your business deals with supply chains, you must have already acknowledged the importance of supply chain metrics in optimizing your business and maintaining it efficient and easy to manage. They are useful tools which help you determine the efficiency of your business and have a clear picture of how your company is doing.
One of the most important supply chain metrics you should consider is the cash to cash cycle time metric. Read on to find out everything about this useful tool that will help your company evolve fast and easily.
What is Cash to Cash Cycle Time Metric?
The cash to cash cycle time metric refers to the duration between the acquisition of a firm’s inventory and the collection of accounts receivable for the sale of that specific inventory. It is usually measured in days and, on the whole, provides you a clear picture about the time between outlay of cash and the recovery of cash.
Every responsible business manager should know and apply this easy formula that will provide you with an accurate view of your supply chain. The calculation formula is the following:
Cash to cash cycle time has some components that provide you with the answers you need regarding how efficiently the extended value stream of your business is operating. Its components are:
Suppliers, which provide raw supplies and are connected to the number of days that payables are not paid;
Your business, which develops, self-produces and fulfills the final services, connected to the number of days that inventory sits;
Customers, who benefit from your services and products and represent the number of days that receivables are uncollected
All of the components above represent the smooth process represented by the cash to cash cycle time and each stage of this process should be carefully considered by you and your team if you desire to have an efficient and optimized supply chain.
Preferred Outcome of Cash-to-Cash Cycle
In a perfect world, there should not be any waste in any value stream listed above. The services you offer are created by production systems that constantly work without dependence on inventory. Therefore, raw materials should not be acquired unless a customer demands a completed output and customers should not be billed and paid with delay upon receipt of a purchased service. In this ideal state, it is a process close to a just-in-time structure, starting from the suppliers and ending with the customers- the most important goal for your business. When receivables and inventory are zero, so will your cash-to-cash cycle time be. Such a zero-day cash to cash cycle is, in fact, lean, and in this situation, your business is close to its best state because you’ve managed to reduce the cycle time it originally displayed. As you can see, the cash to cash cycle time metric is a helpful tool in managing your business well, so you should definitely pay close attention to keeping your customers’ orders fulfilled and your supply chain at the highest degree possible.