Cash Conversion Cycle: The CFO’s Guide to Liquidity and Agility

HOST: Welcome to the Cherry Bekaert Industrial and Consumer Goods podcast series. We explore this dynamic world, discuss the operating challenges facing manufacturers, and offer ideas and solutions. Join us as we uncover growth strategies and enhance after-tax cash flow in the ever-evolving industrial and consumer goods landscape.

MIKE PIOTROWSKI: Let me start with a question. If you could unlock $100 million in cash without raising equity, taking on debt, or cutting headcount, would you do it?

COREY YORK: Most CFOs would unequivocally say yes, but the real question is where that cash is hiding. Today, we're going to show you how to find it.

MIKE PIOTROWSKI: Welcome back. Mike Piotrowski and Corey York here from Cherry Bekaert. We're closing our working capital optimization series with the one metric that ties it all together, the cash conversion cycle.

COREY YORK: We call it Triple C. It's not as tasty as diners, drive-ins, and dives, but it's a lot more valuable to your balance sheet.

MIKE PIOTROWSKI: And Mike is known to cook it up. Triple C isn't just a formula; it's a strategic lens. It reveals where cash is trapped across receivables, inventory, and payables, and when you treat it as your operating drumbeat, liquidity follows.

COREY YORK: CCC equals Days Sales Outstanding (DSO) plus Days Inventory Outstanding (DIO) minus Days Payable Outstanding (DPO). It measures how long a dollar is tied up from purchasing inputs to collecting from customers.

MIKE PIOTROWSKI: If you've enjoyed our previous podcasts, you know we're fond of metaphors of biology and medicine for the balance sheet. You can think of CCC like a financial MRI: you don't guess where the problem is, you read the image.

COREY YORK: A high CCC means cash is stuck, and the breakdown — DSO, DIO, DPO — will tell you where.

MIKE PIOTROWSKI: High DSO indicates friction in quote-to-cash. High DIO points to inventory inefficiencies. Low DPO suggests you might be paying suppliers too early or lacking approval discipline.

COREY YORK: Triple C is therefore your first diagnostic. It's the question you'll ask before launching any working capital improvement initiative: Where is my cash stuck and how much?

MIKE PIOTROWSKI: Corey, let's run the numbers. Say you're a $600 million company with a 30% gross margin. That's $420 million in COGS, about $1.15 million per day.

COREY YORK: Now, if your CCC is 90 days with a DSO of 60, DIO of 75, and DPO of 45, that means accounts receivable of about $98.6 million, inventory of $86.3 million, and accounts payable of $51.8 million. The net cash tied up is over $133 million.

MIKE PIOTROWSKI: $133 million is a lot of money sitting idle. Now let's improve performance.

COREY YORK: Move to median benchmarks for a similar-sized company: DSO of 45, DIO of 60, and a modest DPO improvement to 55. That would free up $53.4 million.

MIKE PIOTROWSKI: If we push to top-quartile performance — DSO of 30 days, DIO of 45 days, and DPO of 65 days — we'd unlock another $53.4 million. That's $106.8 million total. No new capital, just better execution.

COREY YORK: Where do these benchmarks come from? Sources like the American Productivity and Quality Center (APQC), J.P. Morgan's Working Capital Index, and Risk Concern all provide median and top-quartile performance by sector and industry.

MIKE PIOTROWSKI: So how do you move the needle? It starts with sequencing. If AR is the biggest drag, start with invoice accuracy, dispute resolution, and collection cadence.

COREY YORK: AR improvements often deliver the fastest results because they're closest to cash, but those are not risk-free.

MIKE PIOTROWSKI: There are trade-offs. Tightening credit terms or enforcing stricter collections can strain customer relationships and potentially impact sales.

COREY YORK: Mitigation strategies include segmenting customers by risk and value, avoiding a one-size-fits-all approach, automating invoices and dunning, and aligning your credit policies with strategic goals.

MIKE PIOTROWSKI: Corey, let's talk about your sweet spot, inventory. If DIO dominates, we shouldn't slash stock because that's a blunt instrument.

COREY YORK: Cutting inventory too aggressively risks stockouts, expedited shipping costs, and lost sales. SKU rationalization can backfire if it eliminates profitable niche products.

MIKE PIOTROWSKI: The good news is there are mitigation measures. Segment inventory by velocity and strategic value, use ABC analysis, automate reorder points, and align planning with demand rather than just historical averages.

COREY YORK: Payables DPO can also be a quick win, but stretching terms too far risks late fees, supply disruption, and strained supplier relationships.

MIKE PIOTROWSKI: Mitigation strategies include negotiating extended terms where supplier health isn't compromised, using dynamic discounting, and streamlining approval workflows to avoid paying too early due to internal delays.

COREY YORK: The win is an integrated plan. Sales, supply chain, and finance all aligned to a shared CCC target. Let's talk execution for a moment.

MIKE PIOTROWSKI: Here's a five-step framework to operationalize CCC. Number one: baseline — calculate your DSO, DIO, and DPO by business unit and product line.

COREY YORK: Step two: benchmark — compare to median and top-quartile peers using APQC and other benchmarking sources. Step three: commit — set a 12-month CCC target with quarterly milestones.

MIKE PIOTROWSKI: Step four: governance — hold weekly CCC huddles with unified backing of AR, AP, and inventory actions. Step five: instrumentation — use dashboards to track days and dollars unlocked in real time.

COREY YORK: This isn't just a finance initiative; it's cross-functional. When CCC becomes your operating rhythm, the cash shows up.

MIKE PIOTROWSKI: Triple C isn't just a metric or a new program on the Food Channel. It's a mindset and the first question in any working capital conversation.

COREY YORK: Where is cash stuck and by how much? Once you know that, you can act, sequence improvements, align teams, and unlock real liquidity.

MIKE PIOTROWSKI: You might end up with the keys to the city of Flavortown.

COREY YORK: Now go shorten your cycles and make cash your competitive advantage.