It takes money to make money. All businessmen know that. The most fundamental explanation is the Cash Cycle or the Cash Conversion Cycle. When thinking about your company, understanding how quickly you turn cash outflows into cash inflows is as important as how much profit you are booking. This is one of the first metrics I check when I’m hunting for understanding of a business. Today, we’ll see how it applies to a manufacturer I looked at the other day and a distributor that is one of our clients.

Let’s break this down We measure how swiftly a company turns cash into goods or services and back into cash. To do this, compute the cash conversion cycle, or CCC.

CCC = DIO + DSO – DPO   where:

DIO = days inventory outstanding

DSO = days sales outstanding

DPO = days payable outstanding

DIO = 365*Average Inventory/COGS. Days inventory outstanding is how many days it takes to sell inventory. Shorter is better. The more quickly a company can sell its inventory, the less time that cash is tied up as inventory sitting in the warehouse.

DSO = 365*Average Accounts Receivables/Revenue.  Days sales outstanding is how many days it takes to collect accounts receivable. Shorter is better. Quickly collecting the cash for sales means more quickly putting that cash back to work rather than lending it out to its customers (at 0% interest).

DPO = 365*Average Accounts Payable/COGS.  Days payables outstanding is how many days it takes the company to pay the bills to its suppliers. Longer is better. That is, extending payment of accounts payable acts as an interest-free loan to the company and keeps more cash within the company – until they quit extending terms.

Why does the CCC matter? The less time it takes a firm to convert outgoing cash into incoming cash, the less cash you need to run the profit engine. The less money tied up in inventory and accounts receivable, the more available to grow the company, pay investors, or both. To calculate the cash conversion cycle, add ‘days inventory outstanding’ to ‘days sales outstanding’, then subtract ‘days payable outstanding’. Like golf, the lower your score here, the better.

Example: a small distributor

Cash Conversion Cycle
Period 1 Period 2 Period 3
DIO 1.04 0.00 0.00
DSO 51.27 67.19 33.57
DPO 57.09 64.53 33.52
CCC -4.78 2.66 0.04

You can see that, as with most distributors, their cash cycle is balanced as they negotiate terms with their suppliers that let them pay for goods about the time they are able to collect on sales. They’ve pretty much averaged zero days cash conversion over these three periods. In that way they avoid needing large amounts of cash to support their profit engine.

For most small businesses, the CCC can give you valuable insight into how much cash is needed to sustain the business, where it is coming from, and whether or not that is a suitable place. It will also tell you how long it takes to turn a profit into cash. A company that’s taking longer to make cash will need to tap financing to grow faster than its profit reinvestment allows.

Many companies have poor basic capital structures where there is no real source of financing for the needed cash to operate the business, and this needs to be corrected.

Example: a small manufacturer

Cash Conversion Cycle
Period 1 Period 2 Period 3
DIO 299.10 375.04 525.18
DSO 175.03 33.17 24.72
DPO 171.76 210.53 312.80
CCC 302.38 197.68 237.10

This firm needs to do work on its policies and operations. Its position improved somewhat over the three time periods, but it still needs to have 237 times its average daily revenue in cash to finance its operation! Mostly this is due to excessively large inventories that are being financed on the back of paying its suppliers very slowly – almost a year on average! – and collecting from its clients very quickly. One look at this would lead us to go look at the inventory to see if it is still useful or if they’ve accumulated a bunch of inventory that will have to be thrown away.

For other firms, especially firms under duress, the CCC can tell you how well the company is managed or, at least, the degree of distress. Firms that begin to lose control of the CCC may be losing their clout with their suppliers (who might be demanding stricter payment terms) and customers (who might be demanding more generous terms). This is an important signal of future heightened distress — one that is key to investors and lenders.

How much capital do I need to operate my Cash Cycle?

You must have come up with the cash to pay for the inventory not when it is delivered, but when the invoice is due. Normally this is 30 days after delivery, but specific to the terms you negotiated with your supplier. Then, to the extent those terms are sooner than it turns into a sale (i.e. DIO > DPO), you need to finance your cost of inventory per day for that number of days. Additionally, you need to finance your receivables balance for the duration it is outstanding.

Where does it come from

Mostly, you’ve built this up from the original investment in the business, and accumulated profits. Conversely, you can borrow against your receivables and inventory assets (on the balance sheet) to finance them. This financing is called a working capital line of credit, or factoring.

What change over time tells me

For a firm in distress or need of capital, I’m highly interested in comparing a company’s CCC to its prior performance. Here’s where I believe all owners, managers, investors, and lenders need to become trend-watchers. Sure, there may be legitimate reasons for an increase in the CCC, but all things being equal, I want to see this number stay steady or move downward over time. Because of the seasonality in some businesses, the CCC for the TTM period may not be strictly comparable to other fiscal periods. Even the steadiest-looking businesses on an annual basis will experience some quarterly fluctuations in the CCC.

Though the CCC is easy to calculate, it’s definitely worth watching every quarter. You’ll be better informed about potential problems, and you’ll improve your odds of finding the right capital structure for your business.

If you want to get really sophisticated, you can add the amount tied up in property, plant and equipment, call that tangible capital employed, set it as the denominator under profit, and see what returns you are earning on the capital you have tied up in the business. Perhaps you’ll find you’d be better off buying a Treasury bond and sitting on the beach.

Cash is King. Profit numbers live in the accounting fantasy world we call “earnings” and have all sorts of things in them. Understand where your cash is coming from and what it is being consumed by and you’ll be a long way down the path of being able to keep some of it for yourself.

You may know that AdvancedAR ( has quietly become the direct lending division of Ftrans over the last several months.   Ftrans continues our growth and significantly expands  our efforts in this area by creating a distinct funding operation, AdvancedAR, a provider of business lines of credit to small and mid-sized businesses. In conjunction with this launch of AdvancedAR, FNB Bank ( joins with us as our new financing partner.  Ftrans, with over $6 billion in receivables transactions processed, continues to serve as the operations and transaction processor of Advanced AR.
AdvancedAR provides business lines of credit to SMB owners, supported by enhanced trade credit management and collection capabilities that have been developed by Ftrans over the last eight years.   These best-in-class practices and procedures are usually only available to the largest, most sophisticated businesses and help AdvancedAR’s clients collect receivables more quickly and reduce bad debt expense.
“The success that Ftrans has seen over the past few years is a true testament to the value our service provides small businesses,” said Dan Drechsel, CEO of Ftrans. “We believe that the official launch of AdvancedAR, which will now incorporate the direct lending division of Ftrans with FNB as our partner, will allow us to reach more businesses and help them solve their trade credit management and funding challenges.”
 “We believe AdvancedAR will significantly enhance our ability to build communities by helping small businesses grow,” explains Alan Gay, Chairman of FNB Bank.  “Partnering with Ftrans will allow us to serve existing and new clients with loan products that make use of Ftrans’ unique collateral monitoring and trade credit management capabilities.”
About FNB Bank
For over 111 years, FNB has been dedicated to making the community better by helping people reach their financial goals. Originally organized in 1900 in Scottsboro, Alabama, FNB now serves a three-county area through ten branch office locations.  FNB currently provides small business with financing exceeding $137,000,000.  FNB’s founders established FNB as an independent hometown bank and FNB continues to pursue that mission today.

A Simple but Costly Mistake

When looking for a business loan it is critical to present a professional appearance to potential lenders. Everyone knows to be organized, thorough and courteous, but many make a common mistake that ensures lenders won’t take them seriously. The fix is inexpensive and simple but if you aren’t aware of the problem it can be a costly mistake.

Many business owners underestimate the need for a custom email address for their company. Often, the first piece of information a lender sees about you and your company is an email address. Your first impression should be that you have taken the time to structure your business communications correctly. Sending business correspondence from a free email service like Gmail, Yahoo, or AOL undermines professional image.

Additionally, creating a simple web site to go along with your domain provides an extra edge of credibility. Savvy lenders, partner companies and consumers will check your site. Having a professional site not only shows that you are a legitimate business, but provides more information about your company. Consider it a low-cost opportunity to present your sales pitch to each visitor to your page. Most companies that sell domain names will also provide hosting, and many will set up a simple page for you.

A custom business domain name and email service is easy to set up. Some solutions cost less than $10 a year. Owning your domain shows lenders that you are running an established and legitimate company, and that you plan to stay that way. Take the time to set up a custom domain for your business emails. Start your conversation with lenders on the right note.

(The following services provide simple, affordable solutions for small to mid-size businesses)

by Sandra Chesnutt

LinkedIn, the most popular social networking site geared towards professionals, has a long-awaited IPO coming soon. Last week, the company filed paperwork with the SEC to officially begin the process of an initial public offering. Currently, LinkedIn is estimated to be worth $2.51 billion, a number that is expected to grow as the company becomes publicly traded.

If social networking isn’t your thing . . . maybe it should be.

Think of LinkedIn as the next step in the evolution of managing business contacts. LinkedIn is to your Outlook contacts, as Outlook was to your Rolodex. Except now, you have access to key introductions that you never knew your personal network had. As a small business owner, you are already strapped for time so adding another thing to your list sounds daunting. Wouldn’t you love to connect with new prospective business partners, customers and employees without having to “meet for coffee” with your entire network to find out who they know? LinkedIn is a resource to find, talk with and influence your industry. As of December 31, 2010, there are over 90 million registered users of LinkedIn. Now that the site has gained traction, it’s time start a free account and reap the benefit.

What can it do for me?

A new business opportunity might be looking — Be findable. Remember the Rolodex –> Outlook –> LinkedIn metaphor? Think of LinkedIn as the world’s biggest Rolodex – and you and your connections are an invitation-only part of it. You personally, your company, me, everyone can be in this giant Rolodex. Some entries are robust and engaging, others are lackluster. Just as a warm introduction gets more traction than a cold call, a thoughtfully prepared LinkedIn profile with a robust group of connections will help you attract the contacts you need.

Keep in mind people are looking at your “Rolodex entry” as a summary of your career and as way to non-intrusively connect with and learn about you, even if they do not have your email address (The LinkedIn message system includes inter-network message sharing). Even when your contact information changes over the years, people can easily find you without your email address and vice versa. Personally, I don’t consider myself prepared for a phone call or meeting until I have done my Linkedin homework. My link:

Link to the right person for the job. Talented job seekers now actively use the extended LinkedIn network and LinkedIn Jobs module ( – at all levels. Searching for new employees through LinkedIn gives the added bonus of allowing you to investigate a candidate’s connections, work experience, and to an extent their character, conveniently displayed within their LinkedIn profile. We have found some of our best hires directly through Linkedin.

Get free PR. As easy as it is for you to use LinkedIn to size up job candidates, you can be sure potential partners, employees, and contacts are sizing up your business. If you are nowhere to be found, what does that say about your business savvy and industry presence? Make it easy for people to get the correct message about you – from you.

Become an Influencer. LinkedIn also gives small businesses the opportunity to engage prospects on the same footing as larger businesses. Forget press releases and outsourced public relations. Participating in and guiding industry-focused discussions on LinkedIn is an affordable and credible way to build your brand.

Begin discussions and give insight that is meaningful to your business. You can impact your client’s, prospect’s and potential employee’s awareness of you. Try searching LinkedIn Groups for discussions related to your business or industry. One caution, don’t seek attention. Being annoying is one way to make an impression and improve stickiness, but certainly not the one you wanted!

Finally, you can’t afford not to participate in LinkedIn. Ignoring LinkedIn reduces your company’s ability to make impressions on your targets. And we all know, out of sight, out of mind.

Collections Confidential

Recently, I spoke with a professional collections representative, Frances Robinson, to find out the secrets behind effective collections calls. As background, you should know that Frances, who has been in the collections industry for 17 years and has lead our collections team for three years, is well known at AdvancedAR for her kind and gentle spirit.  Here are some nuggets of wisdom from our conversation:

Sandra: What is it like to call someone at a business about payment when you know that they are busy and not going to be excited to get your call?
Frances:  Regardless of the industry there is a common phrase that is universal in the world of collections, “The check is in the mail.” Unfortunately, in many instances the invoice has not even been scheduled for payment, and this line is simply a way to get the collector off the telephone with a promise to pay.

Sandra:  I bet you hear that frequently. And I wouldn’t be surprised if that promise is routinely broken. How do you respond?
Frances:  The key to successful collections is to not take the broken promise so personally that it alters your personality, speech, and professionalism on the follow-up call. It is beneficial to maintain a firm but respectful tone during a collection call. This allows you as the person seeking to be paid to take control of the call and to stress the importance of making your company’s debt a priority without insulting the customer.

Sandra: How do you make sure that your phone call gets results?
Frances:  As I have heard often, it is easier to draw bees with honey than vinegar. The same is true with collections. When a collector treats a debtor with respect, most of the time your invoice is placed closer to the pile of invoices scheduled to be paid.

Sandra: What philosophy have you developed from over 20 years in professional B2B collections?
Frances:  My philosophy has always been to treat people the way I want to be treated. Each call and circumstance is different. A collector may be speaking to a customer experiencing temporary financial problems one month, and enjoying a flourishing business the next month.

Sandra: What’s changed about collections since you first began?
Frances:  Although we are living in an electronic era, one factor remains the same in collections, often the check is actually in the mail, and past due invoices will be paid with follow up and a firm, but respectful, collection call.

What are your collections secrets?

Sandra Chesnutt is a Marketing Director with AdvancedAR.   She spoke with Frances Robinson, a valued AdvancedAR associate who makes collections calls as part of the AR services provided by AdvancedAR.  AdvancedAR combines professional receivables services with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.


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