Cash Conversion – A Secret to Google and Facebook’s Success

 by David Price
 
 May 7, 2018
 

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Apple is the case study for mastering the cash conversion cycle. Last year, the company
collected money from consumers 86 days before they paid their vendors. Because they’ve found
a way to get paid before they have to pay, they are swimming in cash while their vendors wait
patiently for payout.
Apple is a B2C company, but for most B2B companies, there is a lag to getting paid because
their customers are businesses with an invoicing process. In digital while Facebook and Google
wait the B2B average of about 30 days to get paid, the rest of the industry is much less healthy,
waiting more than 90 days in some cases, and that’s hurting everyone.
Is Cash King?
Google and Facebook have a lot of cash, so they can afford to pay publishers net 30 days and
still pay employees, buy new companies, and invest in new development even if advertisers lag
with payments. Looking at the CCCs of many other ad-tech companies shows that they don’t
have the cash to grow operations and pay their publishers on time when their “days sales
outstanding” (DSO) are so far out.

Some of the largest public ad-tech companies are experiencing DSOs of more than 100 days as
advertisers force abnormally long terms on their vendors. This lack of cash needs to be made up
somewhere. Paying publishers right away would hurt their competition, growth, and innovation
because they would become cash-poor.  Some turn to financiers to factor (or borrow against)
their receivables.  However, most ad-tech companies make their supply chain float the lag, and
have DPOs (Days Payables Outstanding) that are several times longer than Google and Facebook
so they can keep cash on hand. While the walled gardens are paying publishers in 30 days, many
ad-tech vendors are waiting 90+ days to pay.

This trick of keeping cash in the middle might be helpful for vendors in the short term, but it
hurts their business in the long term. It makes it hard for publishers to wean themselves off of old
reliable Google and Facebook, and vendors start to feel a hit from the sell side as well as the buy
side.

Focus On Profitability, If You Can

Without cash, companies become less transparent and their quality standards are compromised.
What’s more, while some companies like Google and Facebook are cash-rich enough to hold out
for the right long-term investments, their competitors don’t have that luxury.

For the industry to become healthy, more companies need to discuss the CCC during
negotiations. It starts with buyers. Advertisers and agencies hold the cash and are essentially
sitting at the top of a river, deciding how much water to send downstream. But advertisers rely
on vendors and publishers to get their message in front of consumers, so being too stingy hurts
them in the long run. It would be better for advertisers to ask vendors what they could get in
return for a better CCC than to have a blanket payment rule that strains the very industry they
rely on.
Vendors should also be clearer. If a buyer asks them for full transparency or to develop a new
feature or integrate with a new partner, they should request a shorter payment cycle to cover the
investment. If a publisher is threatening to turn off a vendor due to slow payment, the two
companies might benefit from a frank, long-term profit based discussion.

The industry will benefit from better cash flow. We’d see more innovation, more transparency
and healthier investments as companies are freed to focus on profitability and growth. Rather
than having to stash cash in dark corners and strain quality publishers, the ecosystem could
become a more stable marketplace if the cash conversion cycle were fixed.