How long is your cash stuck in the business?
Your cash conversion cycle is the stretch of days between paying for what you sell and collecting from the customer who bought it. The longer it runs, the more cash funds the gap.
Add the days inventory sits before it sells to the days customers take to pay you, then subtract the days you take to pay suppliers. Each day you remove frees cash roughly equal to one day of your cost of sales.
The math
How this works
What is the cash conversion cycle?
It is the number of days between your money going out and your money coming back. You pay a supplier for materials, the materials sit until they sell, the customer takes their time to pay, and until that payment lands your own cash is funding the whole stretch. The cycle adds the days inventory sits to the days customers take to pay, then subtracts the days you take to pay suppliers, because those days are financed by the supplier rather than by you. The result is how many days of your own cash the business needs to stay on its feet.
What is a good cash conversion cycle for a small business?
It depends almost entirely on what you do. A restaurant turns inventory in days and collects at the register, so its cycle is naturally short. A manufacturer holding materials and selling on 45-day terms will have a long one, and that is not a sign of trouble. Rather than chasing an outside benchmark, track your own number over time and compare it against the credit you need to cover the gap. A cycle that stretches a little longer every quarter is the signal worth acting on.
How can you shorten your cash conversion cycle?
There are three levers, and most businesses can move all of them a little. Hold less stock by ordering smaller amounts more often and clearing items that are not moving. Collect faster by invoicing the day the work is done, setting shorter terms for new customers, and making payment easy. Pay suppliers on the terms they actually gave you rather than early, and ask for longer terms once you have a record of paying on time. A few days off each lever frees cash you would otherwise have to borrow.
Questions people ask
What do DIO, DSO and DPO mean?
DIO is days inventory outstanding, or how long stock sits before it sells. DSO is days sales outstanding, or how long customers take to pay you. DPO is days payable outstanding, or how long you take to pay suppliers. The cycle is DIO plus DSO minus DPO.
Can the cash conversion cycle be negative?
Yes, and it is a strong position to be in. A negative cycle means you collect from customers before your suppliers' bills come due, so your suppliers are funding your working capital instead of your bank. Businesses that take deposits up front or sell for cash often land here.
Does this work for a service business with no inventory?
Yes. Enter 0 for inventory and your days inventory comes out at zero, leaving the gap between paying your costs and getting paid by customers. For most service businesses that gap is all about collections, so receivables are where the attention belongs.
Where do I find these numbers?
Annual revenue and cost of goods sold come from your profit and loss statement for the last 12 months. Inventory, accounts receivable and accounts payable come from your balance sheet or the aging reports in your bookkeeping software. Using an average of a few month-end balances instead of one date gives a steadier result.
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This is an estimate to help you think, not financial, tax or legal advice. Finli is not a bank and does not lend. Your own numbers, and your banker, beat any calculator.