Sunday, February 17, 2013

Total Cash Conversion Cycle Time

We were talking about time compression in a recent Chief Executive Boards International meeting, and a member gave a big-picture view of compressing cycle time when he described his idea of Total Cash Conversion Cycle Time. Briefly, cycle time is the entire duration (elapsed days) that it takes to complete a business process. Not the actual "do" time or process time, which may be in minutes or hours, but the total duration of the process from beginning to end.

This idea of a Total Cash Conversion Cycle Time is a big idea. There's a highly-technical accounting calculation called the Cash Conversion Cycle that takes into account the time between when you spend money and when you get it back. This is a bigger picture than that. What's the total number of elapsed days between the day you get an order and the day you get the cash?

Let's imagine the incremental pieces in your Total Cash Conversion Cycle Time:

Elapsed Days
         0Order Received (by Sales or Order Entry) 
Order Entered
All documentation received (specs, drawings, etc.)
Release to Production received from customer (shop drawing approval, etc.)
Tooling ordered, received and checked out or pulled from tool room
Material Ordered or pulled from inventory
Order released to production
Manufacturing complete

Be honest -- print this page and write in the number of days you think elapse between the completion of each of these steps - the wait time plus the process time (add in other steps in your process that I omitted). Then go take a look and see how long it really takes. Follow the paperwork on an order through your business. Note how many days it sits still while nothing is happening to get you closer to collecting the money.

What if you just took one day out of each of those steps? Are there places where you could take 3 or 4 or 10 days out?   How much variability did you find?   Are there some types of orders where there's more time compression opportunity? 

If you find some big delays in your Cash Conversion Cycle Time and figure out how to fix them, please click Comments" below and share them with others.   By the way, you'll be surprised that when you reduce cycle time you'll also improve quality and reduce cost. 

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Terry Weaver

Chief Executive Boards International
Chief Executive Boards International: Freedom for business owners & CEOs -- Less Work, More Money, More Freedom to enjoy it

1 comment:

  1. Hello, I appreciate your informative blog. I'd like to add. Looking back at the times where I allowed my work to create stress and frustration in my life, I now realize what I thought was important really was not. I am not saying you should not take your work seriously; what I am saying is that we need to realize that life is all about balance. Thanks.


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