Lead to Cash cycle time – what is it? | proCFO

Your virtual CFO proCFO explains “what is a Sales Lead to Cash Cycle”?

Put simply, the Lead to Cash (L2C) cycle time is the length of time it takes for a new sales lead to move through all your business processes and show up as cash in your bank account.  The length of time this takes is a key metric that your virtual CFO can help you measure and improve.

Why would you want to improve this metric?

Let us consider some of the possible steps in a typical L2C business process.


In the scenario above, it takes that business 116 days or 16.5 weeks to convert a lead into cash.  Those timeframes are not exaggerated, and I have seen L2C times considerably longer than this.

Granted, not all businesses will have all those steps in their business processes.  But there is ALWAYS a set of processes to be followed and shortening the L2C time can have a significant impact on your cash flow.

But how do you measure the L2C in an SME business?

This is where your virtual CFO comes in – to help you create the systems to capture the necessary information.  For SME’s, the major challenge can be tracking the information in steps 1-4 from the example above.  Many Customer Relationship Manager (CRM) systems can be configured to capture this data but proCFO have also used a spreadsheet for businesses that cannot justify the cost of a CRM and have a manageable volume of sales leads each month.

Long L2C times are one of the major reasons why SME business owners have poor cash flow.  When this problem is ignored for long enough, SME business owners find themselves getting behind on their employee super payments, and the BAS takes longer and longer to get paid, not to mention suppliers all being paid outside of credit terms.

Then, unable to get working capital finance from their normal banker, the business owner, in desperation, goes to one of the non-bank lenders (Prospa, Lumi, Moula etc).  And the crippling interest rates they charge make the situation worse.

But what if you focus on improving the L2C cycle time?  The impact on cash flow is profound.

Let us review the scenario from above and see where we can make some improvements.

Responsiveness:

Being more responsive to enquiries is not only very good business practice and can get you ahead of the competition, but it is also totally within your control.  Ideally, you should be done on the day of the enquiry.  This could save you two days.

Resources:

Make sure that you have the people and systems to turn your quotes around quickly.  No-one likes to wait a week or more to get a quote and if your competition gets in first you may find the job is gone before you even got in the race.  Save another seven days

Follow-up:

Everyone would love their prospects to give them a prompt answer – but most people are either too busy or just forgetful.  Some mind-blowing statistics below?  Which one are you?  Now, obviously making 5+ phone calls is time-consuming.  This is where sales automation is absolutely critical.

Credit Approval

You cannot control how long a prospect takes to decide.  But you can expedite your credit approval processes.

Internal systems:

Improve all internal systems to ensure the goods or service is provided as efficiently as possible.  Another seven days saved.

Prompt Invoicing:

If your customers are not being invoiced on the day they receive the goods or service you are doing a grave disservice to your business.  With smartphones and cloud technology, any delays with invoicing are unnecessary.

Debtor collection:

Do you absolutely have to offer credit terms?  Why not dispense with the whole credit control process altogether?  For ongoing services, payment via direct debit is now super easy to set up and inexpensive.  For one-off items, as soon as you have provided the goods or service you’ve fulfilled your part of the bargain so you can expect payment.  If you make this requirement clear throughout the sales process your customers will expect it and you save 50+ days in your L2C.  proCFO implemented this tactic with a trade-based client and their debtors went from over $100,000 to less than $10,000 in two short months.

From these few changes to the hypothetical example above we have reduced the L2C by over 60days.  That will have a MASSIVE impact on the bank balance.

In the client example below, proCFO reviewed all the steps in their Sales Lead to Cash cycle and made several changes with great effect.

Their ‘Accounts Receivable Days’ KPI reduced by 10 days and increased the bank balance by $82,359!

Example of bank balance improvement

Recommendations

I encourage you to spend just five minutes jotting down the Sales Lead to Cash conversion steps in your business.  Then do an honest assessment of how long it takes to go through each of those steps.  Unless you are a robot or have already automated this, I am willing to bet there is not much consistency.  So just use an average time.

Then select one or two of them to review and look for ways you can improve or shorten the length of time.  The “low hanging fruit” or the easiest steps are the best ones to start with.

Change is the hardest thing to implement in any business.  And the larger the business and the more people you have, the bigger the challenge.  But the rewards are worth it.

You will not find this information in your financial statements.  And your typical bookkeeper or accountant will never bring it up with you either.

This is why you need a specialist virtual CFO on your team.

 

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