The cash conversion cycle is the number of days between paying for something and being paid for the work it went into. It explains why growing businesses run short of money while reporting profits.

The three parts

Days inventory outstanding: how long you hold stock or unbilled work before it is sold. Days sales outstanding: how long customers take to pay after you invoice. Days payable outstanding: how long you take to pay suppliers.

Add the first two and subtract the third. Thirty days delivering work, forty-five days waiting for payment, thirty days before you pay contractors, and your cycle is forty-five days. You fund a month and a half of work before the money arrives.

Why growth makes it worse

A forty-five day cycle means every new project needs funding for forty-five days before it pays for itself. Doubling your project volume doubles the amount of cash suspended in the cycle at any moment.

This is how a business with a full order book and healthy margins misses payroll. The profit is real; it is sitting in work delivered and not yet paid for. Growth consumes cash exactly when everything looks like it is going well. See burn rate.

Getting it to zero or below

Negative cycles are possible and they are the strongest cash position available. Payment up front is the whole move: money arrives before the cost of delivery is incurred, so growth funds itself instead of consuming funding.

The practical levers, in order of how quickly they work:

  • Invoice on signature rather than on delivery, or split into a deposit and a balance.
  • Bill monthly in advance rather than in arrears. See recurring revenue.
  • Shorten delivery. Work sitting half-finished is cash sitting half-spent.
  • Chase invoices the day they age past terms, deliberately and unapologetically.
  • Negotiate longer supplier terms, which is the one lever that costs you nothing and is most often left alone.