Cash conversion cycle

But a marketer will say, well, if you did 500 and you did a million dollars, that's a 200% return on ad spend.

Yeah, a return on ad spend that's gonna bankrupt us because that person doesn't have the operational or finance lens to look at the cash conversion cycle and the budgeting and basically the cash drain that's gonna happen for that business.

So it's important to look at your gross margin and the cash conversion and how long it takes for that cash to come into the business.

Yeah, that's a really good.

That's a really good lesson, because I've definitely seen that create issues is understanding the cash conversion cycle to budgeting.

I do want to get a little bit into that as well in a second here.

But, you know, I also want to point out what you were talking about earlier that, you know, misclassifying or miscalculating return on ad spend.

So there's things we have to factor into how profitable our launch is or how profitable our return on ad spend is.

The debate hinges on the duration of growth and cash quality.

Capital cycle skeptics are really worried about margin compression, while the forensic models heavily weigh cash conversion.

Okay, let's map out the timeline on this.

How does this play out quarter over quarter?

It did.

July focused on CapEx digestion.

September keeps that tension, but it adds intense scrutiny on cash conversion, grid limits, and those $279 billion capacity commitments.

Okay, so bringing this to the listener, if you're watching the news, what are the invalidation tests? What actually breaks the base case?

I

don't know all of the lexicon of your industry, but one of the terms that I didn't understand was the question of what buyers look for in cash conversion cycles.

What is a cash conversion cycle and what do buyers look for in that?

Sure.

Well, when we think about the cash conversion cycle, it's basically so and again, it's different in different industries.

But let's say I acquire goods that I then from a supplier that I then either convert into a different good and or maybe I'm a distributor.

I just kind of sell those through.

So the cash conversion cycle really refers to how long does it take for me to spend cash? So now I have an outgoing cash to buy the products.

So, you know, always plan for that extra 30 days, both in terms of pricing out the bid and understanding where your cash flow is.

You know? I, I think one of the things that gets overlooked when you're bidding a job or, you know, planning your next phase of growth is what does your cash conversion cycle look like? You know, you have this money coming in, you know what your terms are, but, you know, how, how long does it take to actually get that in on a daily basis? You know, how much are you solving for with invoice factoring if you're signed up for that program? Do you have terms with your vendors? You know, I can tell you right now, most of the, the bigger name, you know, commercial trades out there will give you 30, 60-day terms if your business credit is set up correctly.

Yeah.

And guys, by the way, those same people that will give you terms, like Joe just said, will also probably give you a discount if you pay early, right? And so you can save on materials, and that's why it's, it's a game changer for you.

So knowing how to select the right products and what tools that can help you do that the best, such as 3P Mercury or even a Keepa subscription and other things, that's going to be the very first thing you need to know how to do.

Because if you're buying products that are never going to sell, then this cash flow cycle is basically a wasted time for you to listen to because they'll never sell, so you'll never get your cash back.

And so that's why it's im- so important to select products properly.

That's what we have made our bread and butter on, so to speak, in this community for so many years is because we can teach people how to do that.

But let's talk about the cash flow behind this, because if you are buying the right products, typically what you will see is that you will be able to get your capital back from the day that you invest and you actually put out the credit card, you buy a product.

From that day, it's gonna average roughly 75 to 100 days.

I typically say an average of 90-day cycles, and that's going to be about four times per year you're gonna be able to turn over your money with a bunch of caveats, okay? And so the reason I'm saying that is if you are somebody that's doing online arbitrage utilizing 3P Mercury at where you're able to find a bunch of different products matched to suppliers and you're purchasing the right items, then here's how the actual cash flow cycle typically breaks down.

And I've got this written down because I wanna make sure that I talk through it properly for you.

our best month was 70k on average we're doing 30k i

would say you're constrained for cash conversion cycle the fastest and easiest way to do is going to be to raise your price the issue is you're selling a commodity you're selling essentially videography if you increase your price by 50 and you're selling videos it's a hard justification if you're increasing your price by 50 and you're selling get into the high school of your dreams now it makes a little bit more sense so let me walk through what i think i would do in your shoes Welcome to The Constraint Call.

I'm Ravi Bhavala.

Every week I get on with founders doing anywhere from 50 grand a month to 10 million a month, and I help identify the single biggest constraint holding their business back, and we solve it live on the call.

Is that

correct? I think that's the main issue, to be honest, is that we're not making enough cash quick enough.

I would say your constraints, your cash conversion cycle, you know, you know, the $500 cost per acquisition is really not that bad, to be honest with you.

I like I think that's totally fine.

Which brings us perfectly to the core mechanism that dictates whether you survive that mega order or just, you know, die from it.

The cash conversion cycle.

Yes, exactly.

The cash conversion cycle.

If there is one concept we need to deeply explore today based on our 10-word prompt, it's this.

Absolutely.

Because the cash conversion cycle, or CCC for short, is the exact measurement of how long cash is trapped in that bicycle scenario I just laid out.

It is literally the heartbeat of the company's operations.

We understand the physical reality of each one, but how do they interact? Like how does a shop owner look at all three of these and determine their actual ultimate health score?

We synthesize them into a single incredibly powerful metric, the cash conversion cycle or the

CCC.

The

So this equation calculates the exact number of days a company's cash is tied up in its operations.

Yes.

Think of the cash conversion cycle as a complex relay race.

Oh, OK.

It is the timing trap, that scary gap between when you are legally owed money and when that money is actually liquid and usable.

What's fascinating here is how the cash conversion cycle dictates survival.

Like, in the corporate space, standard payment terms can be net 30, net 60, or even net 90.

Wait, net 90, so they don't pay you for three months.

But the corresponding revenue surge from those holiday sales doesn't actually materialize until late December.

Ah, okay.

So you are identifying the timing mismatch in your cash conversion cycle months before it actually hits.

Precisely.