How can a company improve its cash conversion cycle?

Question

AcadiFi · Accepted Answer

The cash conversion cycle equals DIO + DSO - DPO. Each component offers distinct improvement levers.

Reducing DIO: implement demand forecasting to cut safety stock, adopt just-in-time procurement with reliable suppliers, trim SKU count to eliminate slow movers, negotiate consignment inventory on seasonal items, and automate warehouse operations to speed turnover. Be careful: pushing inventory too low risks stockouts that damage customer relationships.

Reducing DSO: tighten credit policies by running credit scores before extending terms, offer prompt-payment discounts (2/10 net 30 costs about 37% annualized, so use selectively), shorten billing cycles via electronic invoicing, automate collections with systematic follow-up at 30, 45, and 60 days past due, and segment customers to aggressively pursue the worst payers. Escalate severely delinquent accounts to factoring or collection agencies.

Extending DPO: renegotiate supplier terms from net 30 to net 60 or net 75, adopt supply chain finance programs where a bank pays suppliers early while you pay the bank later, centralize payables to capture procurement leverage, and use purchasing cards that extend float. Avoid alienating critical suppliers who might retaliate with price increases or reduced service.

Imagine Saskia Rutherford advising Palewood Industries. DIO is 64, DSO is 52, DPO is 24, giving CCC = 92. Industry benchmarks suggest 40/36/18. Realistic targets: DIO down 20 days via SKU rationalization saves $18M. DSO down 12 days via electronic invoicing saves $11M. DPO up 8 days via supplier renegotiation saves $7M. Total: $36M released, funding growth without raising capital.

Sequence matters. Start with internal process fixes (inventory, collections), then negotiate externally.

How can a company improve its cash conversion cycle?

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