Cash conversion cycle

What it means

The cash conversion cycle ties three periods together: how long inventory sits, how long customers take to pay (DSO) and how long the company takes to pay suppliers. The result is the days cash stays tied up.

If it is positive, the company funds its trade from its own money or a loan. If negative, customers pay before it does, and the business funds itself.

The cash conversion cycle is not the same as working capital. Working capital shows how many euros are tied up on a given day; the cycle shows how long they take to come back. Two companies with identical working capital can therefore need very different financing if one of them is growing fast.

How it works in practice

Three levers shorten it: invoice and chase faster, carry less dead stock, negotiate longer supplier terms. Every day saved releases cash without earning a cent more.

The figure comes from statements you already have: the balance sheet and the profit and loss account. So it can be tracked monthly in management reporting rather than once a year.

When sales grow, the cycle shows directly how much cash the growth will absorb: new purchases have to be paid for across the whole cycle before customer money arrives. We start from this calculation when preparing a client’s bank file for a working capital loan.

What to watch out for

Stretching supplier payments looks like the cheapest lever but damages relationships and raises prices. Factoring or tighter sub-ledger discipline usually works out cheaper.

A company-wide average can hide the problem. One large customer paying late, or one product group that turns slowly, lengthens the cycle while the overall figure looks acceptable. A breakdown by customer, and for inventory an ABC analysis, is worth the effort.