Improve your Cash Conversion Cycle with Asset Finance
04 May 2016
It measures the amount of time the value of the stock is tied up in the production and sales process before it is converted into cash through sales to customers and it is an important metric for equipment suppliers when managing their cash flow.
This is an excerpt from our free white paper, Winning More Business: Offering finance to your customers. Discover how the White Oak UK Partner Programme can help you increase sales, reduce your cash conversion cycle and protect your margins.
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CASH CONVERSION CYCLE BEFORE FINANCE
The above diagram illustrates how the CCC measures the amount of time needed to sell equipment, the amount of time needed to collect receivables and the length of time the company has to pay its bills without incurring penalties.
Equipment suppliers must strike a delicate balance – the longer they take to pay their creditors, the more money the supplier has on hand, which is good for working capital and frees up cash flow. However, if the supplier takes too long to pay its creditors, the creditors will be unhappy and may refuse to extend credit in the future or offer less favourable terms.
Reducing the Cash Conversion Cycle through Asset Finance
Suppliers often have phased delivery/install and additional costs that require payment before the project is completed. Typically these are self-funded through their cash flow causing strain. With asset finance the project can be broken into phased payments for the customer, with the supplier receiving payments from the finance company; removing the cash flow difficulties and reducing the cash conversion cycle:
Cash Conversion Cycle after Finance
By offering asset finance as a payment option to their customers, equipment suppliers can reduce their CCC. The example above shows how introducing asset finance brings a reduction of 25 days, improving both cash flow and the bottom line.
The benefits of offering finance to your customers, do not just stop there. Customers that use asset finance provide suppliers with the ability to only order stock once the finance has been confirmed and order signed, therefore reducing the cash out to cash in timeframe even further.
Also, as some creditors give suppliers a discount for timely payments, equipment suppliers could benefit yet again.