Just add number of days of inventory to number of days of receivables outstanding, and then subtract number of days of payables outstanding. The result is number of days of working capital your organization has tied up in managing your supply chain. This can be quite a significant number, not one to overlook.

This can also be expressed by formula: stock days + debtor days - creditor days. So a company which keeps its stock for on average 20 days, which gets paid by its debtors on average within 30 days and which pays its creditors on average within 45 days, has a cash-to-cash cycle of 5 days. So, for example, a company which keeps its stock for on average 30 days, which gets paid by its debtors on average within 30 days and which pays its creditors on average within 45 days, has a cash-to-cash cycle of 15 days.

Companies that receive cash from their customers at point of sale and that have their inventory under good control will have a short cash-to-cash cycle.

Processes and Procedures Investments and Inefficiencies

Did you realize that working capital is investment you are making in inefficiencies of your processes and procedures plus your investment in your suppliers’ and your customers’ inefficiencies too?

But wait, we are still talking about cash to cash cycle, right?

Policies and Procedures Savings

That’s right, so now you can see relationship between your cash flow, your working capital and your cash to cash cycle. In order to increase your cash flow, you need to increase velocity of your cash to cash cycle by reducing inefficiencies found in your processes, your suppliers’ processes and your customers’ processes. The result is a decrease in your working capital and an increase in your cash. And, as we've seen, this can be a significant number that you shouldn’t overlook.

Chris Anderson is currently the managing director of Bizmanualz, Inc. and co-author of policies and procedures manuals, producing the layout, process design and implementation to increase performance.