Illustrative scenario on fictitious data; the companies and figures are not real.
Freeing up tied-up capital
Type of business: Food distribution company (fictitious)
A company with growing sales that takes short-term loans every month to pay its suppliers.
1Problem
Despite growing sales and profit, the company is constantly short of cash. The CEO asks: "If we are making a profit, where is the money?"
2Data
- Receivable balances by customer and due date (24 months)
- Stock cards and inventory value by item
- Supplier payment terms
3Analysis
- Monthly calculation of DSO, DIO, DPO and the cash conversion cycle
- Ageing of receivables and identification of customers who systematically pay late
- Identification of items with no movement for more than 120 days
4Finding
In the sample data, most of the increase in the cash conversion cycle came from the collection period, and the bulk of it related to a small group of customers on outdated credit terms.
5Action
- Review credit limits and terms for high-risk customers
- A weekly overdue receivables report for the sales team
- A plan to sell dead stock at controlled discounts
6Result
In this scenario, shortening the cash conversion cycle removes part of the need for short-term borrowing. (The figures in the related dashboard are samples.)