Unlock Working Capital by Shortening the Cash Conversion Cycle


After a rough first half of the year coping with spiraling inflation and interest rate hikes, it’s starting to feel like the economy is finally beginning to stabilize. However, financial leaders shouldn’t get too ahead of themselves just yet. Economists agree that the economic landscape in the post-pandemic era is harder to predict, and the next crisis could be just around the corner.

So, how can CFOs prepare for uncertainty while still ensuring growth? By making sure they have quick access to working capital.

Why working capital matters

In the face of this uncertainty, access to working capital is essential as it ensures financial stability and enables businesses to cover operational expenses, manage inventory, and mitigate risk. When working capital is scarce, organizations may need to resort to borrowing money, which can generate additional costs such as interest expenses, fees, and other charges.

Even in periods of calm and stability, having access to working capital is also a great benefit, as it can be utilized to drive growth in critical business areas.

The best and quickest way to free up working capital is by shortening your cash conversion cycle (CCC). In this blog, we’ll explore the importance of working capital and how shortening the CCC can help businesses improve liquidity and liberate working capital for growth and reduce costs.

Why is shortening the CCC important?

The cash conversion cycle is a financial metric that measures the time it takes for a company to convert its investment in inventory and other resources into cash flow from sales. It assesses the efficiency of a company’s working capital management by analyzing the time it takes to sell inventory, collect receivables from customers, and pay its suppliers.

Shortening the CCC can have a positive impact on a business’s financial health in several ways.

1. Speeds up cash inflow

Shortening the CCC can speed up cash inflow by reducing DSO, which is the time it takes for a business to collect receivables from its customers.

2. Reduces borrowing costs

Many businesses finance their operations with debt or equity. The shorter a company’s CCC, the lower the debt or equity it will need to raise.

3. Improves liquidity

Liquidity is a measure of a company’s ability to meet its financial obligations as they come due. The more liquid a company is, the less likely it is to experience cash flow problems. Liquidity is especially important during periods of economic uncertainty.

4. Boosts agility

Shortening the CCC frees up cash that can be used to invest in the business, pay down debt, or seize other growth-generating opportunities. Agility can be especially valuable for smaller businesses that may have limited access to capital markets.

How managed services can shorten your CCC

Everyone wants to shorten their CCC but not many know how to achieve it. This is where managed services comes in.

While managed services has always been a factor in the tech industry, it has been gaining popularity in the finance sector recently as it provides companies with a cost-effective and scalable solution that allows them to focus on their core business activities.

Managed services providers combine vertically integrated solutions, such as accounts receivable and accounts payable, with access to consultancy and funding for an accelerated time to value and continuous financial improvement. Managed services providers take on the burden of deploying and maintaining a finance department’s digital transformation objectives and ensure that the organization has the skilled labor that it needs.

Managed services can optimize the CCC and liberate significant working capital through the following applications:

1. Improved credit management

Real-time monitoring of customer payment behavior enables a business to act fast to limit exposure to bad debt. And nonrecourse agreements provide a business with peace of mind that it will get paid.

2. Electronic invoice presentment and payment

With managed services, you can digitize and simplify invoice preparation, delivery, and payment processing. Advanced technology generates and transmits invoices automatically, ensuring no loss or delay.

3. Accelerated payments

Managed services can reduce DSO by accelerating invoice payments from customers, ensuring faster and more efficient collections. A good provider also offers funding options to bridge payment gaps and a nonrecourse guarantee that eliminates the supplier’s risk of bad debt.

4. Delayed payments for suppliers

Managed service providers can provide supply-chain finance or even fund the extension of DPO without passing this delay (or cost) on to suppliers.

5. Transparency

Managed services provides real-time access to financial insights and data analytics, enabling stakeholders to make informed decisions about working capital, corporate spending, and operational performance.

The economy is unpredictable, and businesses need to find ways to free up working capital on existing revenues to improve resilience and facilitate growth. Businesses cannot afford the expense of taking on new debt or the supply chain disruption caused by demanding longer payment terms. By shortening the CCC, businesses can unlock cash trapped on the corporate balance sheet.

To learn more about shortening your CCC by leveraging managed services, download the full white paper.