Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers

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Homing In on Cash Conversion

In this chapter we’ll take up the cash conversion cycle, which measures how effectively a company collects its cash. But there’s one little wrinkle we have to consider first—how fast a company decides to pay the money it owes its vendors.

Accounts payable is a tough number to get right. It’s an area where finance meets philosophy. Financial considerations alone would encourage business owners to maximize days payable outstanding (DPO), thus conserving their company’s cash. A change in this ratio is as powerful as a change in the other ratios we’ve been discussing. For instance, in the imaginary company we’ve looked at in many chapters now, if managers increased DPO by just one day, they would add about $19,000 ...