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Cash Conversion Cycle – Play Around Account Receivable & Account Payable for Marketing Strategies

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cash conversion cycle

Cash flow is the king and any business pays most attention to the ratio between cash out-flow and cash in-flow, to maintain investors’ confidences and company profitability. 

There are quite a lot of components affecting the cash conversion cycle, such as cash and cash equivalent, account receivables,  inventory, capital expenditure, P&L, cost of debts and debts, etc. For marketers, account receivable and account payable must be one of the components we are able to leverage to design marketing strategies and implement for diverse business goals.

Table of Contents on Cash Conversion Cycle – Play Around Account Receivable & Account Payable for Marketing Strategies

Cash Conversion Cycle

Cash flow is the king and any business pays most attention to the ratio between cash out-flow and cash in-flow, to maintain investors’ confidences and company profitability. Out-flow might be greater than in-flow in a certain period, or in-flow is sometimes greater than out-flow within any cash conversion cycle. Nevertheless, the golden principle must be profitability at the end, which means out-flow must be less than in-flow.

There are quite a lot of components affecting the cash conversion cycle, such as cash and cash equivalent, account receivables,  inventory, capital expenditure, P&L, cost of debts and debts, etc. For marketers, account receivable and account payable must be one of the components we are able to leverage to design marketing strategies and implement for diverse business goals.

Account Receivable: Positive and Negative Number Impacts on Cash Flow

As a brand, letting a customer wait for a little while before paying is called an account receivable. These short-term credits are recorded as current assets on the balance sheet. 

For accounts receivable, a positive number represents a use of cash, so cash flow declined by that amount. A negative change in accounts receivable has the inverse effect, increasing cash flow by that amount.

It implies the account receivable is seen as the business asset. Furthermore, a negative change trend conversely increases the business cash inflow, which is a good signal. These two characteristics are critical for marketers to design marketing strategies.

Account Payable: Positive and Negative Number Impact on Cash Flow

Businesses might have a refund window or certain cashback rules by campaigns after the customers have paid for the product or services and the refund procedure might take some time to proceed. 

So it means the brand doesn’t need to pay right away. Unlike purchases from suppliers, refund windows normally have 7 days, 15 days, 30 days before they’re required to pay up. For the brands, these instances are recorded on the balance sheet as a short-term liability called accounts payable.

Positive account payable number means accounts payable increased by that dollar amount over the given period. Increasing accounts payable is a source of cash, so cash flow increased by that exact amount because of the payment window. A negative number means cash flow decreased by that amount, which decreases the cash flow by that amount.

That means if the refund window or repayment lasts for a longer period, it increases cash flow in the period.

Implication for Marketing Strategies and Cases

Cash flow is the king and a critical signal to determine whether a business is in a healthy shape or not. The result can affect a company’s financing capability. Because of this characteristic, the question is how a marketer can refer to the importance of account receivable and payable to design marketing campaigns or programs, for the purpose to increase cash flow and earnings.

Additionally, with cost of debts increasing which is unlike the zero interest rate before, most companies more pay attention

Lingoda Sprint 100% Money-back Program

I think this program must be one of the best cases leveraging the characteristics of account receivable and payable to polish both CAC or customer acquisition cost performance and company financing PR image.

Basically there are two key critical propositions in this marketing program.

1. 100% Money-back 

Lingoda provides online language courses and a 100% money-back program basically is a successive 2 month lesson program in a language (it requires the student to have one lesson everyday) The student needs to pay two month’s lesson fees in advance.

This program without a doubt can significantly facilitate marketing communication and achieve these 3 goals at the same time:

2. 120 days refund policy

Since the 2nd month after having paid the 2nd month fees, lingodas needs 1st 45 days to evaluate the money-back qualification and another 45 days to proceed with the refund. Thus, there are totally 120 days before the student might be qualified to get back the money.

Thus, from a financial perspective, before the sprint result, Lingoda has received full amount of account receivables and has additional 45 days to determine whether any amount needs to shift to account payable. Even if any amount is confirmed moving to the account payable column, it has additional 45 days to proceed. 

Plus the 2nd month course, Lingoda has a 120 days refund window without any cost of debts to pay for the student. It’s a kind of financing method as well and Lingoda can reuse these account receivables to invest on marketing, hiring, or even short-term finance investment if a huge amount of students join the sprint program.

Wrap up

There are many financial models that leverage the magic of account receivables and payable, such as pre-paid/top-up service, memberships, advertising platform, etc. Hope you can be aware of this and start leveraging to design marketing programs.

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