In a lifestyle business a cash flow cycle, the cash flow cycle is the flow of cash that begins with payment for assets and ends with receipt of cash on those assets. The shorter the number of days in this cycle, the more cash the business has. The cash flow cycle is sometimes referred to as cash conversion cycle as it is how quickly you can convert assets to cash.
This article will be talking specifically about businesses that sell digital assets (more specifically content asset) as opposed to an actual product people can touch.
The cash conversion cycle attempts to measure the amount of time cash is tied up in the asset development and sales process before it is converted into cash either through product sales or affiliate income. This metric looks at the amount of time needed to generate revenue from content assets, the amount of time needed to collect receivables from affiliates and the length of time a lifestyle business pays its bills without penalties.
The internet business is unique in that the cash generated during the cash development cycle could keep generating cash for years to come. For this reason, I have coined the term extended cash flow cycle for lifestyle businesses. This is often referred to as passive income within lifestyle business circles.
The Extended cash flow cycle
As mentioned earlier, the extended cash flow cycle still generates income over multiple periods. The more work you do today, the more benefits you can reap in the future as shown below:
The number of days it takes to convert work into cash depends on how solid your marketing system is. What is even better, your new benefits are stacked with your old one. You see your finances grow exponentially as a result.
Extended Cash flow cycle and the product life cycle
The product life cycle
Your extended cash flow cycle works synonymously with your product/ content life cycle. Every product goes through an introductory, growth, maturity and decline phase. As a result if you want to be successful you have to keep innovating. There is nothing like stagnant growth. Your only 2 choices are grow or die. As long as you are between the introductory and maturity phase of your content asset then you will still keep making money even after the initial phase.
Extended cash flow cycle computation
If you are interested in knowing how many days it takes to start making money once the content or digital content is produced, this formula might be of interest to you.
In a lifestyle business, a blogger might pay for content assets. These assets are either prepaid or paid within 30 days of work done. The content asset is used as a tool to generate sales. If the sales are generated from affiliate income, a receivables is incurred as a result of the transaction. The extended cash flow cycle measures the time between outlay of cash and cash receipts. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the life style businesses’ bottom line.
Computation
For content asset this is computed as:
The number of days it takes to earn income from content asset + The number of days it takes to get cash from affiliate sales (digital product sales gain cash simultaneously) + The number of days it takes to pay related expenses ( In most instances this will be zero).
If you get 30 days from the equation above, this means you can expect to get cash every 30 days from this content until it hits the decline phase (hence the term extended cash flow cycle). Future cash flow should be adjusted over time to account for the decline in income at varying phases of the product life cycle. Over time you will see how efforts today can accumulate income in the future as new efforts are staggered with the old. Of course the cash you receive will vary based on what part of the cycle your content is.
The more work you do today, the more benefits you can reap in the future.
Questions for Consideration:
Are you wondering what the point of this equation is? Here are some questions this equation might help you answer
- How can I get a large influx of cash: You cash flow cycle could help you see which of your products or services generates cash quickest. So if you need an influx of cash you know to focus on the assets that have shorter cycles.
- Can I afford to go on an extended vacation: Your extended cash flow cycle can help you see if you have done enough work generating future income where you can break for a while? It can also show you how much you can expect to make while you are gone.
- Should I take a loan to accelerate growth: If there is an area that is churning cash pretty quickly, it might be worthwhile to take a loan to expand that area?
This article is part 9 in the building financial freedom from your lifestyle business series