TechExec 10: Cash Conversion Cycle, Hick's Law, and Technical Debt

(Total read time: 6 minutes)

Hey there,

Welcome to the 10th edition of TechExec - the newsletter that turbocharges your growth to become a Tech Executive!

Every week, I share a new set of BLTs, where BLTs stand for:

• 💼 B - a Business concept/theory/story

• 💝 L - a lifestyle advice

• 🤖 T - a Tech explainer

This week’s BLTs are:

💼 B - Cash Conversion Cycle

💝 L - Hick's Law

🤖 T - Technical Debt

Now to the main content …

💼 B - Cash Conversion Cycle

Cash Conversion Cycle (CCC) is a metric expressing how many days it takes a company to convert the cash it spends on inventory back into cash by selling its product. It is the heartbeat of a business! And like any good heartbeat, it comes in various rhythms—some fast, some slow. But here is the crazy part, unlike heartbeats, some CCCs can be negative, and that is the best thing that can happen to a business.

So how do we measure CCC? By understanding the core components of a typical sales activity which are:

• Selling current inventory,

• Collecting cash from current sales

• Paying vendors for goods and services purchased

All these steps get mapped to the mathematical formula of CCC …

While its intuitive that businesses would want to sell out inventory and collect the revenue ASAP, they would also want to delay paying supplier as much as possible. But why would that be? Because it allows them to purchase goods without having capital! Another way to look at this is that DIO is all about operating efficiency, DSO is all about collecting cash and delivering goods to recognize revenue, and DPO is all about bargaining power w.r.t to suppliers.

Industries with longer cash conversion cycles include those that require significant time and resources to manufacture and sell their products. For instance, automobile manufacturing companies usually have longer cycles due to the complexity and time-consuming nature of designing, producing, and distributing vehicles. Similarly, construction companies often experience extended cash conversion cycles because they must invest heavily in materials, equipment, and labor before receiving payment upon project completion.

On the other hand, industries with shorter cash conversion cycles typically involve faster-moving goods or services that can be sold quickly. For example, retail businesses like grocery stores have relatively short CCCs because they purchase inventory frequently and sell it rapidly to customers. Large online retailers like Amazon leverage their bargaining power so much that they end up having negative cash conversion cycle, i.e. they get paid before their suppliers get paid.

While businesses would want lowest CCC possible depending on the sector they are in, how would they actually achieve that. Well, they should optimize their inventory management strategy, slash excess stock, and go lean. On the other hand, they can boost their DPO by mastering the art of negotiation and scoring longer payment terms with suppliers. Lastly, they can shrink their DSO by automated invoicing.

💝 L - Hick’s Law

Have you ever wondered why you spend more time staring at that cereal aisle, contemplating your entire existence, when you absolutely know you are going to buy Fruity Pebbles? It’s called Hick’s Law, a fascinating psychological principle that states that the time it takes for an individual to make a decision increases as the number of choices increases.

Now, you might be thinking, "Great, so I'm indecisive. How is that helpful?" Well, identifying this tendency is the first step to use it our advantage. Individuals can make faster decisions and avoid the dreaded "analysis paralysis." For instance, limiting the number of choices while shopping or selecting a movie to watch can help reduce the time spent contemplating and promote quicker action. So the next time you're stuck between buying that red or blue shirt, remember Hick's Law and just buy the gray shirt like Mark Zuckerberg does.

As for enterprises, understanding Hick's Law can help businesses design more user-friendly products and services. By limiting the number of choices and streamlining decision-making processes for customers, businesses can actually increase efficiency and sales. A prime example would be a restaurant with a limited but well-curated menu that enables customers to choose quickly, resulting in higher satisfaction levels and quicker table turnover rates. Want another example? Just check out the evolution of TV remotes!

🤖 T - Technical Debt

Picture this: you're working on a tight deadline to build a software feature. You take a few coding shortcuts to deliver on time, knowing full well that you'll have to come back later to clean up your mess. Voilà! You've just incurred technical debt. It's like putting off doing the dishes until they pile up and become an overwhelming, stinky burden.

Technical debt is the metaphorical thorn in the side of many a software development project. It refers to the implied cost of additional work caused by choosing a quick and easy solution over a more time-consuming, but ultimately better, approach. This debt accumulates over time as developers make compromises to meet deadlines or budgets, resulting in a codebase that becomes increasingly difficult to maintain and modify. But is it all bad though? Absolutely NO!!! Like all debt, sometimes it makes sense to incur a technical debt. It may allow tech companies to move fast, stay nimble, and make pivots efficiently. But when companies get overboard, and are not keeping track, that’s when a major disruption hits them!

So how can companies avoid accumulating unbearable technical debt? They can start by fostering a culture of quality over speed. While deadlines are important, it's even more crucial to ensure that code is clean and efficient from the get-go. Investing in proper training, documentation, code review processes, and automated testing tools save a lot of heartache (and headache) down the line.

When it comes to resolving existing technical debt, companies must roll up their sleeves and face the music. This might involve refactoring code, updating outdated systems, or even re-architecting entire applications. While this may seem like a daunting task, think of it as spring cleaning for your software – a necessary evil for long-term success.

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Until next time!

Gaurav