The tenth and final profit driver we will examine is cash. Cash is of course the lifeblood of any organization and its importance becomes all the more pronounced when you don’t have much of it. Managing cash is also exceptionally important when organizations are growing because of the financial demands that growth can create. Finding opportunity in this area however is something of a re-hash of many of the opportunities we’ve discussed regarding the other profit drivers. Cash levels are a result of how you manage your sources of cash sources (A/R, A/P, loans, etc) and your uses of cash (A/P, inventory, capital expenditures, debt repayment, etc.)
For analytical purposes, we think about cash in terms of how it moves out of an organization and then eventually back in which is referred to as the cash conversion cycle. The length of time it takes to convert the invested cash back into cash can be calculated:
Cash Cycle = Days inventory + days receivable – days payable
The important thing to identify is what is happening over time to the cash cycle. If it’s getting longer it means more cash is needed, which can obviously become a problem. If it’s getting shorter, it means that cash is being freed up for other uses by the company. Based on what the analysis indicates, you can then turn to the other profit drivers we’ve previously discussed to find some opportunities for improvement.
As a general rule for improving cash positions, looking at tightening up the accounts receivable process is usually always a good idea.
