ToolBox - As a small business owner, it’s essential to understand the cash conversion cycle (CCC) and how it impacts your company. This metric looks at the number of days from when you first purchase materials until you receive payment from your customers.
Unfortunately, for most construction companies, lowering this number is an ongoing challenge. APQC found that the bottom-performing companies have a CCC of 74 days or longer.
If you’re looking for ways to improve your cash conversion cycle and free up working capital for your business, a business charge card can help.
The cash conversion cycle tracks the amount of time it takes to convert inventory (or project materials) into cash. In other words, it measures the amount of time it takes to:
The lower your cash conversion cycle, the better. That’s because a lower CCC indicates that your company has a fast materials-to-sales pipeline. A high CCC means your business takes a long time to convert inventory to cash.
The cash conversion cycle is influenced by what payment options you offer to your customers and how long it takes you to collect payment. It’s also affected by how your company chooses to finance its purchases.
The cash conversion cycle is a metric all companies should be tracking, but it’s especially important for construction companies. That’s because most construction companies have to invest a lot of upfront cash before they can secure new projects.
And once they do land a new project, the company will have to invest in additional materials and supplies. Then it may be necessary to sit on those materials for months while delivering on a project for a customer.
There is no option for Just-in-Time inventory, and current supply chain issues only exacerbate this problem. These factors put a strain on the cash conversion cycle and can lead to serious cash flow issues.
Construction companies that have learned to reduce their cash conversion cycle have more cash on hand and can therefore take on more projects and grow their businesses faster.
On the other hand, if your CCC is too high, you may end up with a growing business that can barely stay afloat. It's easy to think that high revenues can solve all business problems, but cash flow management is actually more critical.
Businesses with poor cash flow often struggle with the following issues:
Using a charge card can help free up cash flow and improve your cash conversion cycle. Here are four ways it does this:
For too many contractors, business growth doesn’t feel very feasible. Either you have to sacrifice cash flow to fund customer projects or rely on expensive, high-interest credit cards or small-business loans. Using a business charge card gets you away from all of that.
A business charge card is a flexible form of financing and a great way to manage your construction business. Using a charge card can help you improve your cash conversion cycle, take on those bigger projects, and begin to see real growth in your business.