Fashion is fickle, today more than ever, and staying ahead of trends and consumer demands is critical to staying relevant in today’s hyper trend cycle world. Getting it right means growth and market share gains, get it wrong and retailers find themselves adding more inventory but making less sales. The impact on cash flow is significant. One way of assessing the health of a retailers inventory is the cash-to-cash cycle, which measures the time taken to convert inventory investments into cash from sales. Here we dive deeper into this important metric and how retailers can start to improve it.
What is the Cash-to-Cash Cycle?
The cash-to-cash cycle is a comprehensive metric that spans the time from when a business pays for its inventory to when it collects cash from the sale of that inventory. It includes three main components:
Days Inventory Outstanding (DIO)
The average number of days inventory is held before being sold.
Days Sales Outstanding (DSO)
The average number of days it takes to collect payment after a sale.
Days Payables Outstanding (DPO)
The average number of days it takes to pay suppliers.
The formula is: Cash-to-Cash Cycle=DIO+DSO−DPO
Why Reducing the Cash-to-Cash Cycle Matters
Improved Cash Flow
A shorter cash-to-cash cycle means faster cash inflows. This improved liquidity allows businesses to reinvest in new inventory, marketing, and growth opportunities without relying heavily on external financing.
Reduced Inventory Holding Costs
Holding inventory for extended periods ties up capital and increase storage costs. By accelerating the rate of sale, businesses can reduce these holding costs and free up valuable warehouse space.
Enhanced Responsiveness to Market Trends
The fashion industry is highly dynamic, with trends changing rapidly. A shorter cash-to-cash cycle enables retailers to be more agile, responding quickly to new trends and consumer preferences without being bogged down by old inventory.
Lower Risk of Obsolescence
Fashion merchandise has a limited shelf life. Reducing the time inventory spends on shelves minimizes the risk of markdowns and obsolescence, protecting margins and profitability.
Strategies to Increase the Rate of Sale
Data-Driven Inventory Management
Utilise advanced analytics and forecasting tools to predict demand accurately. This ensures that you stock the right products in the right quantities in the right locations, reducing the likelihood of overstocking or stockouts.
Reactive Promotions
Create specific category rules and process around identifying slow selling items and trends and adjust prices based on demand and seasonality. This can help drive optimised sell-throughs and maximise revenue in-season.
Omnichannel Integration
Ensure a seamless shopping experience across all channels—online, in-store, and mobile. Unifying inventory management across channels can ensure online size availability and help fulfil orders more efficiently and reduce excess stock.
Supplier Collaboration
Working closely with suppliers to develop a responsive supply chain is vital to be able to respond to in-season demand. Negotiating favourable payment terms and ensuring timely delivery of inventory will also lead to an improved cash to cash cycle.
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