5 September 2016

Aside: The cash-to-cash cycle

The cash-to-cash cycle is completely irrelevant to theatre.

It refers to the time between cash being spent and cash coming back in and it's normally analysed by businesses that make a physical product and who buy/sell on credit.

Let's say that you run a business making tiny raincoats for cats. First, you have to buy a bunch of raw materials (fabric, trim, thread, packaging). Those raw materials get made into the final product and then your inventory will sit in a warehouse until it gets sold to pet shops.

The cash is tied up in three areas:

Suppliers - You have to buy raw materials and pay for production up front because you're a new business. Also, you're niche and low volume so you have no buying power.

Inventory - It takes your factory 30 days to actually produce and ship the finished goods. It then takes you 30 days to sell through all your inventory.

Customers - You sell to shops and they all have credit terms of 30 days. All of them exceed this and you don't harass them for payment because you don't want to damage the relationships.

The cash-to-cash cycle above is ~90 days. Cash is spent immediately but inventory takes 30 days to arrive. Inventory then sits in the warehouse for 30 days. Customers take at least 30 days to pay, so it takes ~90 days to turn cash back into cash. This makes life difficult because you have operating costs and need cash to pay them.

All of that cash you spent at the start of the 3 months isn't really doing anything for your business. Maybe you're OK with that because it's going into stock and "speculate to accumulate" but you shouldn't be OK with it. You should be outraged and screaming at the above example.

Cash is absolutely the most vital non-breathing resource an organisation has and it needs to be used in the most efficient way at all times. Note, this is nothing to do with profit motive: it's about being smart with your resource allocation and using cash to keep adding value to the organisation's purpose (which, admittedly, may be the generation of profits).

So, how to improve things?

Suppliers - You negotiate payment terms, meaning you will have 30 days to pay for the product (which, conveniently, means you end up paying for the product as it arrives).

Inventory - You halve your production orders. Your margin takes a hit due to the lower volumes but your inventory now takes only 15 days to sell through.

Customers - You focus on collecting sums due in 30 days, and start adding late payment fees and interest. The relationships don't break down but shops pay on time (after a bit of grumbling).

You just halved the cash-to-cash cycle. Cash goes out, 15 days for inventory sell-through and 30 days for payment. 45 days.

How about a complete shift?

Suppliers - You keep your 30 days payment terms.

Inventory - You keep your production order the same size.

Customers - You start selling online, direct to customers. Turns out the internet loves cats, who knew? You decide to cut out the shops and just focus on selling direct because MARGIN! Web customers pay up front, so it takes zero days to collect payment.

You just cut the cash-to-cash cycle to the 15 days it takes you to turn the inventory, which means you have cash to tie up in development of that cat papoose you've been thinking about.

-----

Probably irrelevant to theatre.

Although...

Looking through some recent hawks analysis and doing some rough calculations; Paines Plough appear to take about 90 days to pay and collect whilst Underbelly take 80 days to collect but 120 days to pay. That seems like useful information to have.

Let's say you're an 'emerging' company making your own work.

You put your cash into development of a production. Perhaps your development time is 90 days.

You don't really have inventory, which is great: nothing to add here. Except that your tour will take time. So, maybe this should be the amount of time you're spending on tour. Let's say 30 days because bad routing happened (this assumes you got a tour without showing the work somewhere else and without more time passing between - we could add a year here if you've yet to start booking it).

Some of the theatres taking your work say payment will be made within 60 days because they're changing over their box office software or undergoing a refurb or are too busy to do it sooner. No problem, you're going on TOUR and you don't want to rock the boat.

That would be a cash-to-cash cycle of 6 months in a fairly optimistic example.

What about one of the venues on the tour?

Well, we know from the example above that they are taking 60 days to pay their suppliers (that's you).

They don't have inventory (ignore merchandise and the bar).

Their customers (your audience) pay cash up front so they don't have to chase them for payment (although they might have to chase some corporate or rental customers).

So, the venue's cash-to-cash cycle is actually negative: they have cash coming in before they spend it. Amazon's cash-to-cash cycle is famously negative as they take longer to pay suppliers for inventory than they do to turn inventory (a huge competitive advantage over bricks and mortar retailers). The insidious thing about negative cash-to-cash cycles is that if they're too negative then they imply an organisation is just using other people's money to fund their operating costs (a little bit like a pyramid scheme).

You could theoretically improve your cash-to-cash cycle by:

1) Shortening your development time (no - out of principle)
2) Shortening your tour (no - need to amortise those development costs)
3) Pushing venues for payment (ok)

The venue only really have one option to improve their cycle: delay payments.

Both parties cannot improve their cash-to-cash cycle at the same time.

Since the cash-to-cash cycle isn't applicable to theatre, this entirely conceptual conflict of interest probably isn't worth spending too much time thinking about.

Unless, of course, you think that cash generation is essential to running an organisation and can see that the dichotomy sketched out above is not sustainable for either party long-term. Perhaps it seems a classic game theory problem: operating independently, the venue stretches the artist to breaking point but then has no artist. Repeat until supply of artists is exhausted. Collaborating with cash-to-cash cycles in mind, venues would have to shoulder a worse cycle time (and may need to adjust models to suit) but the long term picture would be much better for the sector.