The cash conversion cycle is an important process for any third-party logistics provider (3PL) or freight broker that wants to improve their financial health. However, in many organizations, the focus on this key area of performance is often left to the CFO and their team. It is understandable why this is a common thought; however, leading organizations understand that all roles are critical to optimizing the cash conversion cycle.
The Cash Conversion Cycle, also known as the Order-to-Cash Cycle represents the end-to-end process of receiving, processing, and fulfilling customer loads, culminating in the collection of payment for services provided. For Freight Brokers and 3PLs, this cycle starts when a customer requests transportation services or freight movement and concludes when the payment for those services is received and accounted for.
Following I will detail the various roles, beyond finance, that are needed to ensure the cash conversion cycle is operating efficiently.
The Executive Management Team
The executive management team, including the CEO and COO, needs to be deeply involved in this process because of the impact it will have on an organization’s cash flow which enables investing in growth areas of the business.
As Deloitte correctly states, there are opportunities that may be missed if all of the members of the executive team are not involved in this process. By having collaboration across all of the stages of the cash conversion cycle, 3pls and brokers will be in a better position than those that fail to have such alignment.
The Operations and Logistics Team
Logistics and operations teams have a significant impact on the fluidity of the cash conversion cycle. The quicker organizations can move goods from suppliers to customers, the shorter the cycle becomes. Operations and logistics teams need to focus on reducing lead times, streamlining processes, and optimizing transportation routes as a means of improving the time to cash.
Multiple research shows, as do our own customer testimonials, that the operations and logistics team involvement in the cash conversion cycle is a must in order to realize maximum benefit.
A lengthy cash conversion cycle may likely be an indication that the company is not converting sales into cash quickly enough, potentially affecting sales commissions and incentives. It can also limit the ability to extend favorable credit terms to customers, leading to lost sales opportunities.
By collaborating with the finance department sales teams can align their strategies with the company’s financial goals. Shorter conversion cycles allow for reinvestment in other strategic areas of the business and allow for increased flexibility of credit terms to customers.
The Role of AI in the Cash Conversion Cycle
Artificial intelligence (AI) can significantly enhance the ability to optimize the cash conversion cycle and is one of the reasons why IT needs to be involved. Machine learning (ML) algorithms have the ability to analyze historical data to identify patterns, continue to learn, and predict future cash flow trends. This allows 3PLs and freight brokers to make data-driven decisions, optimize inventory levels, and align purchasing decisions with demand forecasts.
Furthermore, AI-powered robotic process automation (RPA) can streamline financial processes, reducing human errors to nearly zero percent and increasing efficiency by more than twenty-five percent by automating routine tasks like invoice processing and collections, the finance team can free up resources to focus on other strategic parts of the business.
The Cash Conversion Cycle is critical to the financial health and operational efficiency of freight brokers and 3PLs. Every stakeholder, from top management to individual teams, has a role to play in understanding and improving the process. By leveraging AI technologies, organizations can unlock new levels of efficiency, reduce their day’s sales outstanding (DSO), improve profitability, and position themselves for sustainable growth.