Don’t Underestimate the Cash-to-Cash Cycle

I don’t recall the first time I was asked about the “cash-to-cash cycle” for a business, but I do remember my surprise when I realized how long it was. The term “cash-to-cash cycle” refers to the time from when the cash outlays start for a new product, until the time that the cash revenues are fully realized (deposited in the bank).

When a new product development starts, it can be as a result of an idea, a competitive product, or the need for “something new” in the product line. Whatever the reason, as soon as a decision to proceed has been reached, cash starts to flow out. Designers, engineers, marketers and so forth are all working and being paid. Other expenditures also start. Market research must be done, or completed if some preceded the decision.

The Cash-to-Cash Cycle is Not to Be Underestimated

Prototypes must be built, which might mean an outlay for tooling and/or equipment. Testing must be done, perhaps at outside laboratories. Package designs are developed. Financial analysts develop costs and pricing models and the marketing and sales organization start to develop the launch plans.

A new product launch needs to have enough product to supply initial demand, and in many cases “fill the pipeline.” Remember, everything I have listed above costs money: salaries, benefits, suppliers, materials contractors or service providers, etc. No money has come in yet, but it is sure flowing out. The steps listed so far typically take weeks or months. If “hard tooling” like dyes, molds, etc. must be built to manufacture the product or its parts, that alone can take 3-6 months, with the time for trial runs, debugging, etc.

If equipment or a facility must be purchased or built the time frames are usually even longer. Six months or more is required to equip and tool and prepare to make a product — even if an existing facility is used. Finally, after all of the design, development, marketing, sales, engineering, manufacturing, supply chain, analysis/testing, and so on are done, products might be ready for sale. And 4-8 months, or more, will have elapsed.

When the first orders are obtained and the promotional launch is committed, still more money flows out. Advertising, brochures, a website, packaging, travel to customers or trade shows to “reveal and launch” the new product all consumer cash. But none has come in yet. At last, the new products are ready to ship. Transit time is fast. If they are made in the U. S., it takes a few days to a week. If the products are made outside the U. S. — say in China — some of the preliminary steps might move faster due to the long work days and weeks worked by Chinese manufacturers, but now delivery time via ocean freight is several weeks at best. Our 4-8 months has now stretched to 6-9 months since cash started flowing out, and still none is flowing in.

The product reaches the distribution center of the customers and after a few days more waiting, moves to the point of sale or use: a retail store or a distributor (more delay) or another factory where it is built into some other product. Then the payment terms start; payment terms are typically 30-60 days, or more. And most companies pay just a bit late. If we assume just 60 days (2 months), the first cash flowing in arrived 8-11 months after cash started flowing out. And this is without any “upsets.” Of course, things always go wrong, so let’s add another 30 days for miscellaneous, unforeseen delays at some point(s) in the process.

There you have it. Money finally starts flowing into the company. Assuming the company rapidly receives and deposits the payment and there are no “disputes” about any part of it, the cash-to-cash cycle is complete. The cash-to cash cycle time is about 9 months to a year after it started flowing out. Unbelievable, right? But it can easily be more than that, which is why so many startups run out of cash. Plan wisely and keep track of your cash reserves, now that you know how to calculate your cash-to-cash cycle.

Editor’s Note: This article was previously published at OPENForum.com under the title: “Don’t Underestimate the Cash-to-Cash Cycle.” It is republished here with permission.

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John Mariotti


John Mariotti John Mariotti is an internationally known executive and an award winning author. In The Chinese Conspiracy he merges a fictional thriller with factual reality of America’s risk from Cyber-Attacks. John does Keynote speeches, serves on corporate boards and is a consultant/advisor to many companies.

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