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Cash to Cash – Making Lemonade in Today’s Economy

It used to be easier. When my best friend opened her very first lemonade stand, she did not have to use her allowance to purchase the lemons. Or the sugar. Or the paper cups. Or the table. Or the paper and magic markers for the “25 cents” sign. Or….well, you get the picture.

Fast-forward (more than) a few years. Imagine that we are running a lemonade company. Without our parents giving us our materials, we need to get suppliers for our raw materials (lemons, sugar), finance the production resources (labor and machines to squeeze and mix and package) and the inventory carrying costs, until we can sell our finished drink and collect our revenues from our customers – either direct customers (who, incidentally, love our lemonade), or distributors and supermarket chains (who love our end customers).

The cash-to-cash cycle determines how long we can walk the tightrope of having enough lemons to make lemonade. +The cash-to-cash conversion cycle calculation is: # of days to collect receivables from customers <plus> # of days inventory is kept in stock <minus> # of days to pay suppliers. The smaller that number, the better. +That means if we keep our lemonade in stock for 5 days, pay our suppliers in 30, and receive revenues from our customers in 45, our cash-to-cash cycle measures 45 + 5 – 30 = 20.

There are several factors that go into each of these elements of the equation; each of the Key Performance Indicators, or KPIs, must be managed to accomplish the ultimate goal of reducing the cash-to-cash cycle time, and optimizing cash flow.

  • Accounts payable: You need to pay your suppliers. KPIs to consider include late payments, which typically incur a penalty and sour the relationship; invoice error rates when entering a vendor invoice, to improve the efficiency of the process; and late payments, which typically incurs not only mistrust, but penalties.
  • Operations management: Once you have manufactured your product, you need to get it into the hands of customers. Critical KPIs include finished goods inventory carrying costs; finished goods write-offs, which could be due to quality issues or overproduction – or obsolescence if the lemonade is no longer fresh; the cycle time between receiving an order and shipping it; order fill accuracy, where errors will delay invoicing; and the cycle time between shipping a product and invoicing for it.
  • Billing and collections: You need your customers to pay you. Key KPIs that influence your receivables include the error rate in bills sent out, delaying an accurate bill that should be paid; overdue receivables; invoice short pays by your customers; time to resolve customer disputes with invoices; and write-offs for uncollectible receivable balances.

There are many best practices that have been put in place by high-performing companies, including automation to reduce errors; centralized systems to reduce duplication; real-time communication with suppliers and customers; and integration of systems and collaboration between departments to ensure that sales forecasts and production plans are in sync. For the specifics, take a look at the cash-to-cash benchmarking survey, developed by SAP Value Engineering together with ASUG , the American SAP Users Group.

The smaller the number of your cash-to-cash cycle, the better. Still, managing your cash does not mean putting long-standing business relationships at risk. You do not want to be the company that goes to the extreme of consistently squeezing your suppliers or your customers. Put a solid strategy in place to manage your cash as well as your relationships – and save the squeezing tactics for those lemons.

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  • Great to see you getting active in SCN, Birgit.

    Quick question – does SAP have standard/template analytics solutions – like a dasboard – that shows cash-to-cash over time?

    • Thanks, Vijay, I know you’ve been active for a while!

      Value Engineering, as a free service to customers, uses Xcelsius to show a dashboard to customers to provide them with the details of their performance in comparison to their peer group(s).

      We currently do not have a standard delivery of these KPIs as part of a preconfiguration within the standard product, that would need to be configured on a project; items to be considered include, for example, determining which document types should be considered for particualr KPIs.

      Are you finding you need this for your customers?

      • Interestingly, I was on a pre-sales call a week ago – and one of the things the client executive was keen was dashboards for financial KPIs.  And in that meeting, one of the tech guys asked me if there was any standard content KPIs they can use as an accelerator. And then I saw your blog – and thought I will check with you.
        • Did the client mention which KPIs were of the most interest? When I responded, it was specific to the cash-to-cash KPIs, but my guess is that the executive might have been thinking beyond that.
          • Some of the ones he expressed interest was in days sales outstandings, forex effect on AR and AP, Cash flow performance (probably cash-to-cash) etc. The closest I could find on a quick search were some BW reports that can be tweaked to get some of the info .