Why Shortening the Cash Conversion Cycle is Crucial With Matt Putra

Guillaume: Hello everyone. Guillaume Le Tual here, host of the Ecommerce Wizards Podcast where I feature leaders in e-commerce and business. If you’re an e-commerce store owner or if you’re involved in the finances of an e-commerce store, this episode is for you. Today’s guest Matt is a CFO, Chief Financial Officer specialized in e-commerce. So he has all kinds of techniques, optimization tricks that he can teach you to improve the company’s finance, make the entrepreneur more wealthy, more successful and just make the situation more pleasant to be in by optimizing cash flow, cash conversion cycles, by improving how we structure financial deals, and so on. This is a very interesting episode if you’re in the finance or entrepreneurship space of an e-commerce store.

Today’s guest is Matt Putra. He’s here for the second episode today. He’s the founder of the company EightX, he’s a fractional CFO, Chief Financial Officer and an expert in e-commerce, that’s his area of expertise. We had a full intro about him in the first episode, so this second one will be somewhat short. It’s about cash management for e-commerce store owners merchants, more specifically a method to shorten the cash conversion cycle sometimes called CCC. So, Matt, thanks for being here again.

Matt: You’re welcome. It’s great to be here.

Guillaume: All right, let’s jump right into the topic. How do we shorten the cash conversion cycle? And what’s that in the first place and why should you care as a merchant?

Matt: The cash conversion cycle is a measure of how long it takes from the time you pay

for inventory to the time you collect cash from your customers. It’s a complex calculation but very simply, if you think about it in this way, I pay for my inventory in month zero, I sell it in month two and I collect the money in month three, so then you have a 90 day cash conversion cycle basically. Now, shortening it is unbelievably important and it’s really, really effective. I looked at the cash conversion cycle for somebody who was doing about $7 million or $8 million a year in sales, shortening the cycle by two days created an additional $200,000 in cash at the end of the year that we were forecasting for. So it is very effective to pay attention to this metric. And here are some ways to shorten the cycle; so when you think of paying for stuff, selling, collecting it, well, what can you do? Well, push those timelines together. So when you order your pill from, let’s say, China, one of the things I did with one of the companies that I own, is I emailed my Chinese supplier and I said, ‘Hey, instead of 30% deposit can I have 25%?’ They said, ‘Yeah, of course, no problem’. It is a very, very small ask but a number of small asks will add up to those two days and 200 grand. So I asked him, ‘Hey, 25%?’ He said, ‘Yeah, no problem’. I went to another supplier and I said, ‘If I pay you an extra 1% can I have 60 day payment terms?’ These people were like, ‘Yeah, no problem’. And I spent 500 grand a year with them but I got a whole 30 days. So now what’s happening is, I’m buying the stuff and I’m starting to sell it before I pay them.

Other things you can do is, obviously you can reduce the cost of your inventory. Can you negotiate even 5%? Just very small asks. A very good friend of mine and a business partner, his name is Kevin Chen tag, what he says is you take nibbles. He’s coined this phrase at least as far as I know, ‘nibbles’. You ask for very small things at regular occurrences and they add up to a very important number, which is in this case the 200k. So Kevin says take ‘nibbles’. So don’t ask, ‘Can I have 20% off on your inventory?’ No. ‘Can we do 5%?’ And three months later, ‘Hey, can we do another 5%?’ And if you continue to buy with them, typically those asks are manageable. Maybe instead of 5% you say, ‘Look, I’ll pay you an extra 1% for 30 day terms’. Sometimes they bite on those things. So, small, small nibbles will add up on the collecting from the customer side. Well, can you do pre-orders? Can you do partial pre-orders? Can you do deposits? Is there something in your product line that’s often limited or really sought after such that you sell out? You’ll say, ‘Look, we have a shipment coming in two months, you can reserve your piece by paying 10% now, or 20, or the whole thing’. For some people it works for the whole thing. When you do that, now you’ve brought your payment structure this way and you’ve bought your collection this way and you’ve shortened that cash conversion cycle. And like I say, you don’t have to ask your customers for 100% upfront, ask for 10%, that’s a nibble. But it’s hugely, hugely effective. Now, I don’t know if there’s an app that would handle this small prepayment. Guillaume, do you know if there’s one?

Guillaume: For small prepayment, not too sure. Just not specifically for that.

Matt: Right. So there are emerging options like subscriptions, you might talk to your community and say, ‘Hey, for X dollars a month you can come to our site, reserve pieces that are coming on the boat so that they don’t sell it, so you make sure you get an option?’ That’s an option. But anytime you’re collecting money faster than normal, even if it’s a little bit of money, and anytime you’re paying a little bit later than normal it reduces the cycle.

Guillaume: Yeah, we just do it through normal accounting, invoicing, or if it’s for the user interface and a bit of programming they would have something like a deposit feature.

Matt: Yeah, exactly. Or it could be a subscription or it could be membership. And then there’s obviously reducing the amount of cost of something or increasing the amount of collections. So can you reduce your cost of goods sold, can you increase your AOV? Both those things will help. And again, I’m not saying take your AOV from 100 to 150, sorry, average order value, I’m saying take your average order value from 100 to 105. That is a great place to start, 5% is huge when you look at how many thousands of orders you’re going to get in a year. So go through your business, can you pay just a little bit later? Can you collect just a little bit earlier? Can you pay a little bit less? Can you collect a little bit more? Those four things, small, small steps in each of those four things, systematic and tracked. So make a spreadsheet, put the headings for the four things, put some ideas and start asking people, can this? Can you do that? Can I do this? Can I do this? Track which ones are working and then repeat the process every couple of months. Review that sheet, review the four things, and again, take nibbles every three months and you’ll be so surprised at the amount of cash leftover in your business. Like I said, one client’s two-day change and the cycle was $200,000.

Guillaume: Yeah, and another thing to keep in mind is if you want to double the bottom-line, the profits you don’t need to necessarily double the top line because you have your costs and all that. So just a simple example, a $1 million business that has a 20% net profit after taxes, so they have $200,000. But it needs to run the whole business, it’ll cost you $800,000 but once that cost is already covered to double your profit maybe all you need is to reach $1.3M, $1.4M. You don’t need double if you can increase efficiencies a little bit everywhere. Can you increase the price by 10%, 12%, or 15%? Can you bundle it or present it differently? Can you add something of value so that they are willing to pay 15% more? Can you reduce your costs by15%? Can you improve your cash conversion cycle by 15%? So it’s just, like you say, small improvements of about 15% everywhere and you will double the whole business profitability.

Matt: Well, you would know about them, I don’t know what you call them, but in the cart and then on your way to the checkout. I just checked out with Monos Luggage the other day and I hit the button ‘Add to cart’ and this sidebar popped up saying, ‘Hey, by the way these few things that aren’t that expensive really go well with what you’re buying’.

Guillaume: Yeah, like cross-selling.

Matt: And then right after I finished the checkout they said look, ‘There’s another chance. There’s a couple things that might make sense, do you want to do it?’ I mean, it was a wonderful flow. You might have some stats on this, but you might be looking at a 10% order bump.

Guillaume: It could be more, it depends on what you’re selling but it can be way more than 10%, it can be all the way to 30%, anything from the impulse buy to actually truly giving value to the customer. If you have something complicated like some kind of online hardware store, what’s your project? Do you want to renovate something in your bathroom? Well, you’ve only bought the sink, did you think about the pipes? Do you have the glue for the black pipe? So you can suggest to them a better combination of the related products that people will typically buy. It’s almost like giving them a checklist, like, to do that project this is what you need. Do you already have it at home? Or DIY setting or do you need it and then ‘add to cart’?

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Matt: Yeah. I can tell that you really understand the customer journey because this checkout with Monos was probably the most beautiful checkout experience that I’ve had in like two years. And what you’re saying was exactly what it was like, it was like, ‘Look, you’re traveling, here’s some stuff that would make your traveling a bit easier’. It was like they just knew what I needed and what I really wanted. It’s awesome, right?

Guillaume: So it’s a mindset of truly helping and truly giving value to the person and not trying to just shove them a sale.

Matt: Yeah, totally. And one more thing I’ll add about the cash conversion cycle, we talked about, pay slower, collect faster, pay less, collect more. The last thing is to hold less inventory. Stale inventory is a killer. If you buy stuff that doesn’t move, it hurts because it’s just dollar bills sitting on your shelf. You’ll just sometimes never get back unless you fire sale it or you’ll feel burned half of the stack because you have to get rid of it. Especially this year, buy conservatively. Selling out is a very big problem for Amazon but less so for Shopify. So there might be some SKUs that you would allow yourself to sell out of, or at least sell out of just before the shipments come in. Be very careful with inventory this year, we don’t know what consumers are going to do. Consumer confidence is struggling and if you think about 2021 it was a great year, but it’s not that year. Just buy carefully, you just don’t want to get stuck with bags of money on your shelf that you can’t move or that you have to throw half the bag in the garbage.

Guillaume: Yeah, there were a few market verticals that stayed stuck at the end of the season before winter. Like, ‘Hey, there’s all that summer stuff we haven’t sold unlike the previous years we’re stuck with X millions in inventory this year’. And then they’re like do we want to fire sale it? But then you just said it’s like a pile of money that you burn half to get rid of it. It’s like they’re in a glass where you’re not sure. And then they say with all the disruption in the supply chain right now I don’t know what will be my cost to resupply my store with all that inventory. So some of them will say, well, maybe I’ll just sit on it for now and liquidate it more slowly, if they can afford to do so. Because you don’t know the future about resupplying in some of the verticals, sometimes it’s more safe if you have continental inventory resupplying that does not involve too much tech piece and overseas shipping.

Matt: Yeah. And if you’re in a position where you’re stuck with too much inventory,

talk to the marketing team, talk to some other experts. I’m not necessarily a growth and sales expert, without discounting can you give stuff away? Like your CAC for most people was a minimum a third of your customer acquisition costs. Yeah, your customer acquisition cost is minimum, a third of your average order value for most people. Can you just give stuff away? Let’s say you have a customer that buys from you and you’re like, ‘Look, here’s another thing that you can send to a friend for free and you have a gift card on it’. Or now you might have a customer that just got a gift for free that you would have paid X dollars to acquire, but if you send them a free item that’s sitting on your shelf maybe that’s a way, because they’re going to get, let’s say it’s a $50 Hoodie. I’m going to get a $50 Hoodie from my friend and with your gift card on it. The hoodie costs you $15-$20 but the value to me is 50 bucks. So what’s the actual cost of acquisition? Well, that’s an interesting opportunity for some people.

Guillaume: Yeah, the giveaways and bundling. If you’re a retailer selling the same stuff as everybody else, there is no branding differentiation because it’s not your own brand label. Sometimes it comes back to how much you are willing to pay to acquire a customer and that can include adding gifts. Like, ‘choose your gifts on the checkout’ kind of deal. It’s like that’s why I’m going to buy from you instead of buying from the other guy. The other guy doesn’t give me a gift when I check out. It’s the same price but I buy it from you, I have those free samples and I have this little thing with it that doesn’t cost me too much.

Matt: Absolutely.

Guillaume: That’s a pretty good coverage of the cash conversion cycle, fancy terms, very simple. You spend money to buy anything, inventory services, pay employees, how fast does the money come back in your company? The faster the better and it makes a big difference to your financial result and how easy it is to run the business. Because if the cash conversion cycle is too long you’re going to feel more strapped in the monthly cash flow. No matter how many zeros that business has, it is true because it’s going to scale with the size you’re at, seven-figure, eight-figure, or nine-figure, if the cash conversion cycle is not good it can create a big problem in the cash flow even for the large companies. So it’s a very important concept there to optimize.

Matt: Thank you. Yeah, great.

Guillaume: All right, Matt, if somebody wants to get in touch with you, what’s the best way?

Matt: You can check out my website www.eightx.co. LinkedIn is a really great place if you’re looking to hear back from me within a day, LinkedIn, send a post, comment, ask a question, I’m happy to chat. I answer lots of questions all the time. And if you follow me on LinkedIn, you get to kind of see what I’m about and how I think and eventually you might decide, hey, I’m going to ask a question. Those are the best places to find me.

Guillaume: All right. Thanks for being here, Matt.

Matt: Thank you so much Guillaume, I really appreciate it.