The Online CMO by Philip Hallenborg

Any entrepreneur knows that sales are worth nothing until they are converted into cash. In a technical accounting term this is referred to as cash convergence cycle, CCC.

The cash convergence cycle gives us  business managers some important direction on how to look at our business. The diagram above is applicable to physical goods selling and inventory holding businesses (in a company like Dell where cash is collected before goods are produced (built-to-order) and accounts are payable, the CCC is negative).

One of the most important take aways is that we need to manage the collection of cash effectively. In layman’s terms this means offering the customer adequate payment options to balance maximizing sales (i.e. every thinkable payment method) vs. minimizing the time between day Y and day Z above.

So what are the key payment options?

Invoicing customers is probably my biggest nightmare. The biggest problem is in my view not the risk of default (which can be effectively addressed with credit worthiness systems) but the lower velocity (sending invoices back and forth) and the unpredictability of time of payment. Many companies that sell to consumers manage this with fees and auto transfer schemes, but this is often only relevant for subscription type products and services.

Leasing and consumer financing have obvious advantages. They open your sales to a cash drained segment of the market, but much like invoicing velocity is even lower. A third party is involved and leakage due to documents not returned etc is in my view a show stopper. If you want to offer this the process has to be bullet proof. It is in very few cases.

Many suggest credit card as the most easy and simple. But depending on your bargaining power and type of card, big players will pay at least 1% and smaller players 2-3% of receipt values. This is not ideal. Especially if you are running a business with gross margins of <=20%. In addition, if you have an automated execution system of credit card payments you will have to manage exceptions as there are many reasons for credit card payments not being accepted. Velocity slows down and you need people that outbound on missed opportunities.

Paypal is very simple for the user but will still be linked to a credit card in most cases so it shares some of the inherent problems and costs of credit cards (see table below from paypal).

Often over looked is direct bank transfer. In most cases this is done at no fees and it provides the most simple and cheap way to collect cash upfront. Obviously you will be addressing the liquid portion of your market segments but given the lack of fees, the higher velocity and the simplicity for customers, this is a very strong proposition for markets with high internet penetration and ebanking.

There are probably no rights and wrongs. But I never seize to be surprised by the arrogance in big retailers towards this crucial part of any business. Collect your cash – or someone else will.