CFOs Zero In on Optimizing the Cash Conversion Cycle

With the digital transformation of corporate finance comes the promise of retiring outmoded approaches to the cash conversion cycle, making payments complete faster and having funds on hand for needed expenditures and investments in a far timelier manner.

Recent PYMNTS research done in collaboration with Corcentric analyzes how CFOs want to drive digitization in areas like the cash conversion cycle to not only gain greater visibility into cash position but also reduce processing times and tasks and speed access to working capital.

In interviews with 250 CFOs as part of PYMNTS’ third annual Visa B2B Payments Month discussion series running throughout October, PYMNTS found that 40% of CFOs across both the manufacturing and retail sectors are investing in tech to improve views into a cash position.

Calling this pursuit “critically important,” Corcentric President and COO Matt Clark noted to PYMNTS’ Karen Webster that the three drivers of the cash conversion cycle [are] days payables outstanding (DPO), days sales outstanding (DSO), and days inventory outstanding (DIO).

“The ability to influence that cash conversion cycle comes on that DPO and DSO front,” he said.

What CFOs need to ask themselves is “are you optimized in terms of timing your payment strategy, in terms of when you’re paying your suppliers, and then are you optimized in terms of how you’re getting paid by your customers?”

At this point the general reply is likely to be “no” or perhaps “working on it,” but with the tools now available and pandemic-tested, CFOs can move on cash conversion more meaningfully.

Conceding that many CFOs have resigned themselves to how it’s always been done, Clark said “there’s a new kind urgency around saying let’s not let it happen to us. If we can get that cash conversion cycle optimized, it has meaningful differences, especially to manufacturing firms that need to be able to have that cycle of buying goods, manufacturing and selling goods to customers in the right place to then allow them to do the things they want to do strategically.”

See also: CFOs Bring New Risk Mindset to Digitization 3 Years After Urgent COVID Shutdown

The Receivables Rally

Citing pandemic-era instances where companies are paying suppliers for goods before they even get loaded — much less shipped — from overseas, Clark said “That cash is out the door” as they play the waiting game to add value and in turn sell to their own customers.

“You’re getting those elongated cash conversion cycles from a supply chain dynamic that makes that problem and pain point even more acute given the dynamics at play” from a supply chain perspective,” he said. That was OK to keep in the depths of COVID, but suppliers are stable now.

That gives CFOs maneuvering room to build on that progress and address the in-house issues that are still holding back key digital investments and ultimately, future growth.

See also: B2B Digitization Born out of Pandemic Necessity Still Yielding Unexpected Benefits

Clark said CFOs are now taking stock of incremental improvements they’ve made. That’s triggering a shift in priorities to “step back and look at this whole life cycle from an end-to-end perspective and see if there’s a way to address it on a more holistic basis, versus a kind of point solution incremental basis that the market has been conditioned into.”

Key benefits of this activity will show in improving receivables. Clark said, “I see a shift in that mindset to where we can make some of the biggest impacts on that receivable side, making sure that we’re able to accommodate all the needs of our customers in terms of how they want to be exchanging purchase orders and invoices, how they want to be processing payments.”

Noting that the post-pandemic CFO doesn’t want to settle for incremental improvements anymore, Clark said “It goes back to … addressing that entire finance and accounting life cycle in a very holistic and strategic fashion, [and] being more intentional about how the entire life cycle is addressed versus this reactive mindset” that has historically dominated strategy.