Many supply chain companies report profits on paper but face chronic cash shortages. The issue isn't profitability—it's the cash conversion cycle: suppliers demand immediate or short-term payment, while customers are granted long credit terms. Companies must bridge the gap with their own capital. The larger the business volume, the more they have to advance.
1. Calculate the cash conversion cycle
The net cash cycle is calculated as the sum of days inventory outstanding and days sales outstanding, minus days payable outstanding. Multiplying this figure by the average daily cost gives the working capital a business must maintain. A 30% growth typically drives a proportional increase in this financing requirement.
2. Include financing costs in the quote.
If financing costs aren't included in the quote, you're effectively subsidizing the customer with your profits. Calculate these costs using the annual rate multiplied by the payment term and list them separately on the quote so customers can clearly see what drives the price difference.
3. Segment customer credit
Segment customers by payment history, industry standing, and order volume, then assign tailored credit terms and limits to each tier. Enforcing a uniform credit period for everyone may seem fair, but it actually distributes risk equally across the board.
4. Align financing with business rhythm
Credit lines, factoring, and supply chain finance tools each have their own costs and thresholds. Align them with peak-season rhythms instead of scrambling for funding only after a gap appears.
Growth itself doesn't create risk; mismatched payment terms do. Treating the cash conversion cycle as a core metric surfaces issues earlier than focusing on the income statement.