Cash conversion cycle

The cash conversion cycle is days of inventory plus days of receivables minus days of payables. It measures how long a dollar is tied up in the business between the moment it is paid to a supplier or an employee and the moment it comes back from a customer. A long cycle means growth consumes cash. A short or negative cycle means growth produces it.

For a BC distributor, contractor or manufacturer, the cycle explains the puzzle of a profitable company with an empty bank account. A company with sixty days of inventory, forty-five days of receivables and thirty days of payables has a seventy-five day cycle, and every additional dollar of annual sales needs about seventy-five days of funding before it returns. That funding comes from the owner, the line of credit or the suppliers, whether anyone planned it or not.

In practice, we measure each of the three parts from actual data, set a target for each and change the policies that drive them: deposits, invoicing timing and collections for receivables, reorder rules and dead stock clearance for inventory, negotiated terms and payment timing for payables. The cycle is tracked monthly, and shortening it by a few weeks releases cash the business already earned.