The cash conversion cycle
Lesson 7 of 13 in our free Business Money Advanced guide: a 5-minute money game with the key points below.
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Questions you'll answer
Kettle & Co holds stock for 10 days, customers pay in 5 days (mostly card payments) and it pays suppliers in 30 days. What's its cash conversion cycle?
Dex's gadget firm holds stock for 90 days, customers take 30 days to pay, and his suppliers want paying in 15 days. How long is his cash conversion cycle?
Quick facts
- Ordering smaller batches of stock more often → Shorter. Fewer stock days, so less cash sitting on shelves.
- Giving customers 90 days to pay to win more orders → Longer. More debtor days means cash arrives later.
- Taking a deposit when customers order → Shorter. Some cash comes in up front.
- Paying suppliers early for a tiny discount he can't really afford → Longer. Fewer creditor days lengthens the cycle. Only worth it if the cash is genuinely spare.
- Fact: “A fast-growing business with a long cash cycle can need more cash the faster it grows.” — Each extra sale ties up cash for longer before it comes back.
- Myth: “A negative cash conversion cycle means the business is losing money.” — It means customers pay before suppliers need paying. It's about timing, not profit.
- Myth: “Selling more always fixes a cash shortage.” — With a long cycle, extra sales can make the shortage worse in the short term.