You have permission to publish this article free of charge, as long as
resource box is included with article. If you do run my article, a courtesy reply to sean@bizmanualz.com would be greatly appreciated. This article is 1,067 words long including resource box. Thanks for your interest. The Cash to Cash Cycle Part Four of SeriesPart One: Inventory
Part Two: Accounts Receivable
Part Three: Sales and Marketing
Next Week: Complete Cash to Cash Cycle
The white flag is just a nose away…toward Million dollar prize in cash savings for your business…
So far, in Inventory and Accounts Receivable, we've found $250,000 each in cash savings. Then we found another 250K in Sales and Marketing. And so, now, Accounts Payable is final process within Cash to cash Cycle - and also final $250,000.
The cash cycle is undoubtedly single most important process to optimize for any business – from when you spend money to when you get money.
Circling Cash to Cash Cycle
So let’s tie this back to accounts payable - event that pays for liability incurred by purchasing, which is for inventory required by manufacturing to meet demand. Sales generate this demand that creates accounts receivables, which is turned into cash. And now we have come full circle and completed discussion on cash to cash cycle.
Increasing Velocity of Accounts Payable Processes
Your accounts payable is a bit different than other processes we have examined so far. The first three processes we looked at represented processes where focus was on reducing size of assets (inventory or accounts receivable) or expenses (marketing) and increasing velocity or cycle time. But in accounts payable our focus is on increasing size of asset, while maintaining a solid credit rating - and increasing velocity of process.
Now let’s look at how to find $250,000 in accounts payable savings. If your organization has $500,000 in accounts payable each month, then STOP! We can find $250,000 in savings right here. Where, you ask? Increasing payables by 25% will produce $125,000 in cash plus $125,000 from automating tasks, taking more discounts, and managing process better.
Service Business Procedures Case Study
An organization with $600,000 in monthly payables needed assistance. We examined their payables process to understand and quantify workflow, paper processing and credit issues. Then we designed and implemented a process to increase their use of payables and discounts, improve their payables cycle efficiency, and tie it to their purchasing and receivable cycles. We then reinvested $50,000 back into an Enterprise Resource Planning (ERP) program to automate some of processes that weren’t automated already.
The metrics we developed reduced their purchasing & payables expenses by 25% and increased their efficiency from 50% to 75% within 2 months of implementing new procedures. With these new processes and reports, company now tracks payables cycle efficiency and average days payables, rather than just bills paid on time or outstanding balance, as measure of their payables effectiveness. The result: an extra $300,000 in cash plus a 50% increase in process capability (capacity).
