Managing Cash

Effective management of cash is essential for a company to thrive. Cash is king because it affects our liquidity as a business and the investment opportunities that we have. One key element of cash management is the cash conversion cycle. The cash conversion cycle is the number of days it takes us to buy our inventory, convert it into a finished product, sell it, and then collect the accounts receivable balance.

Cash Conversion Cycle = Days in Inventory + Days in AR – Days in AP

Two of the main questions in cash management are, “Are we receiving cash quickly enough?” And “Are we paying out what we owe as slowly as possible?” We want to receive payments as quickly as possible so we can start using the funds, and for the money that we owe, we aim to pay it as slowly as possible so we can hold onto the money.