The cash conversion cycle (CCC) is the time it takes for a company to turn cash into products or services and then receive payment from customers. A supply chain disruption, such as a pandemic or a natural disaster, can cause the CCC to lengthen as companies struggle to source raw materials and get products to market. Inflation can also lead to longer CCCs, as companies have to adjust prices upward to offset the increased cost of goods. Ultimately, the goal is to minimize the CCC so that cash is not tied up unnecessarily.
This piece is posted in Fintech and penned by the CEO of Toronto-based VersaPay, which provides receivables automation solutions to banks and industrials. The gist of the posting is very relevant since it speaks to the current inflationary cycle conundrum, which along with ongoing supply chain disruption can easily cause drastic challenges for a typical company’s cash conversion cycle. We have covered this in issue member research and ongoing postings, so now that it has risen to an almost crisis level concern, especially in a potential stagflation scenario, it is worth refocusing on digital financial processes.
‘Recent data from the US Labor Department found that for the twelve months ending in February 2022, inflation rose by an astonishing 7.9%, reaching a 40-year high. For reference, for a healthy and stable economy, the Fed targets an annual rate of inflation of 2%. This is the highest surge in consumer prices we’ve seen since 1982…
While in the natural course of the economy what goes up must come down, economists are predicting that inflation will remain high throughout 2022. Already, price increases that were thought to be temporary due to pandemic recovery have lasted longer than predicted. And now with the conflict in Ukraine causing oil and gas prices to spike, we may be looking at an even longer-term inflation scenario.’
The author goes on to summarize what is causing the problem, how manual processes exacerbate issues and the real benefits of automation. Most companies are typically able to focus on one or two key things in terms of enterprise projects, so improving the ability to improve working capital flexibility through managing DSO in times of inflation and rising WACC is quite a good investment of time and money, especially if it can be implemented in relatively quick fashion.
‘When deciding how to raise prices to cope with inflation, carrying out price changes on a customer-to-customer basis instead of unilaterally is the strategic way for businesses to go. Having clear visibility into customers’ payment histories via a collaborative AR solution can be indispensable for deciding which customers should get a price increase and which should not…
It’s difficult to know when inflation rates will return to normal. As we’ve seen, economists’ projections can be proven wrong. For this reason, businesses should think fast to shore up cash flow now so they may better withstand whatever challenges come their way.’
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group