What are your business cycles?

A way to understand and benchmark your business is to identify the cycles within the business.

The sales cycle is the period from the initial contact through to the point at which a sale is made.

The delivery cycle is the period from the receipt of the order or the signing of the contract through to the completion of the delivery of the product or service.

The production cycle is a sub-cycle of the delivery cycle and is the period from receipt of the order through to the completion of the product (but not its delivery or installation)

The order to cash cycle is the delivery cycle plus the credit terms taken (not offered) by your customer.

You can extend this thinking to almost any part of the business but the key point to recognise is that the longer the cycle the more resources are required to complete the cycle.

At its very simplest level if the order to cash cycle is (for example) 120 days that means you have to fund the operating costs of the business for 120 days.

Add to that a sales cycle of (say) 90 days and you have to fund the business for 210 days or the best part of a year. Ouch!

In practice, of course, in an established business the cycles overlap so that the cash from last month’s orders is available to fund this month’s overheads, so it doesn’t look anywhere near as bad.

However, if you can shorten the cycles in your business you’ll reduce the amount of cash tied up in the business and take the pressure off working capital.

Check by talking to other businesses in your sector to see if their cycles are similar to yours. You might find their experience is different – so you can implement improvements in your business.

If you really do have an extended production cycle, think about asking for partial payment as the work is being done rather than waiting until everything is complete and delivered.

 

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