Cash-to-Cash Cycle Time

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  Cash to cash cycle time looks at the amount of time, usually days, of working capital a business has tied up in managing its inventory or supply chain.  Like many metrics, the more efficient the cash-to-cash cycle time is, the fewer days an organization's cash is unavailable for use.

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  A cash-to-cash cycle time of one month or less would be considered a good time.  On the other hand, a cash to cash cycle time of two to three months would show that an organization's cash is tied up and not available for use for what many industries consider to be a dangerous amount of time.  Please note that the cash to cash cycle time can vary quite a bit between industries.  With this in mind, it should be every organization's objective to reduce their cash to cash cycle time. 

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How to Improve Cash-To-Cash Cycle Time?
​  One of the primary ways that a company can reduce the amount of time that cash is tied up, is to optimize the inventory they have on hand.  If cash is not tied up in inventory it is available for use.  This is why continuous improvement strategies like lean are a very effective way to improve cash to cash cycle time.  Be aware that improving your overall inventory strategy will require alignment of all parties including supply chain partners as well as finding and removing waste and creating a more streamlined organization.  Improving order-to-cash processes will also reduce your cash-to-cash cycle time.  As invoice processing and receipt of customer payments improves, the amount of time that an organization’s capital is tied up will improve as well.  Three possible areas a company can look to improve their cash-to-cash cycle time are:

1. First, Invoicing processes can be mapped out and waste can be eliminated to create a more streamlined process flow.
2. Second, many organizations can also reduce or eliminate wasteful activities that do not transform information or materials in any way.
3. Finally, organizations may also analyze antiquated systems and processes and choose to revise inefficient processes that increase the likelihood of billing errors and causing information or material defects. ​ ​

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Example:

• It takes K&K manufacturing an average of 60 days to sell its inventory.  Once they have sold their product it then takes them about 30 days to collect payment from customers. In general K&K pays its suppliers in 75 days.  With this data  we can calculate our Cash-to-Cash Cycle Time.  First we add 60 Days Inventory Outstanding and 30 Days Sales Outstanding.  Then we subtract 75 Days Payables Outstanding and we get a cash-to-cash cycle time of 15 days.

Challenge:

• Let’s say K&K manufacturing takes an average of 32 days to sell its inventory.  Once they have sold their product it then takes them about 90 days to collect payment from customers and in general K&K pays its suppliers in about 60 days.  What is K&K’s cash-to-cash cycle time and what observations can you make from this metric?  Share your thoughts in the community, comments or upcoming assignments and receive a coupon for one of Lean Strategies International LLC's Training Courses.

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