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Improving Cash Flow. Hence Free Cash Anybody? Evolving beyond DSO, DIO & DPO.

Stating the obvious, the majority of organisations are able to increase their net cash flow positions from their operating activities to be able to achieve greater growth, investment, efficiencies, increased dividends etc.

 

To achieve increased cash flow from operating activities one requires a realistic and robust cash flow strategy, policies, supporting processes, controls, tactics, analytics and insights.

The above points tend to get attention when cash flow shortfalls start arising, at which point in time the focus is on getting cash in the door by whatever means and at best addressing the symptoms (AKA the bush fire). Once this cash flow situation has been overcome, we then begin to see the bad behaviours continuing without addressing the root cause. Sound familiar?

Within the analytics and insights part of the cash flow strategy framework we need to evolve by moving away from just looking at only days sales outstanding (DSO), days payable outstanding (DPO) and days inventory outstanding (DIO), as these measures just report aggregated results to calculate a cash conversion cycle (CCC) result with no insights.

We need to start looking at what is behind these numbers (DSO, DPO, DIO, CCC) in a systemised manner.

The real value in being able to maximise net cash inflows from operating activities involves systemising the analytics and insights components. These involve incorporating different drivers into your CCC reporting/analytics cycle that are unique to each industry, organisation and department that impact the organisation’s operating activities. The identification of which drivers are used are influence by the organisation’s target operating model.

For your benefit, below is an example of one of our CCC analytics reports/dashboards that may be useful or of interest to you in your work place. This example incorporates customer churn, invoice profitability, excess stock on hand, stock on hand, supplier performance, supplied in full on time in addition to the DIO, DSO, DIO and CCC measures.

 

Rundas Capital delivers consulting services to various industries on strategic performance improvements, turnarounds, interim executive, NED services and analytics.

 

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