The cash conversion cycle is the number of days between money leaving your business and money coming back. You work it out as stock days plus debtor days minus creditor days. If the answer is eighty, then every pound of new work you win is tied up for roughly eighty days before it is yours to spend.
That gap has to be funded by somebody, and in a small business the somebody is usually you, your overdraft or your suppliers. It is also the number that explains why growth so often feels like being punished: the year you win the most work is the year you feel poorest, because more sales means more days of funding, not less.
What is the cash conversion cycle?
Three components, one subtraction. Each one is a length of time, measured in days, and each one is taken straight from figures you already have.
Stock days
How long you hold materials or goods before they are sold. Closing stock divided by cost of sales, times 365. In a service business this may be nil, or it may be work in progress you have never thought of as stock.
Debtor days
How long customers take to pay after you invoice. Trade debtors divided by sales, times 365. This is almost always the largest of the three, and almost always the one owners are most wrong about.
Creditor days
How long you take to pay suppliers. Trade creditors divided by cost of sales, times 365. This part is funded by somebody else, which is why it is subtracted.
Stock days plus debtor days minus creditor days gives you the cycle. It is the number of days your money is somebody else's working capital.
Why it matters to an owner
Because this number, not your profit, decides how much cash growth will demand. Every extra pound of sales drags a proportion of itself into the funding gap for the length of the cycle. That is why a business can run out of road while its profit and loss account is showing the best year it has ever had.
It is also the cheapest finance available to you. Shortening the cycle releases cash you already own. There is no application, no interest, no personal guarantee and no lender's opinion of your sector. Owners will spend a fortnight arranging a facility and no time at all on the twenty days sitting in their aged debtor list.
Putting numbers on it
The figures here are illustrative arithmetic, not a claim about any business. Put your own in and the shape holds.
Take a contractor turning over £1.8m, with stock at 42 days, debtors at 68 and creditors at 30. The cycle is 42 + 68 − 30 = 80 days. As a rough rule, the working capital tied up is the cycle multiplied by daily revenue. £1.8m over 365 days is £4,932 a day, so eighty days of it is around £395,000 sitting in stock and in other people's accounts.
Now shorten it. Getting debtor days from 68 to 45 is not heroic: it means invoicing on completion rather than at month end, stating terms on the quote, and calling the five largest overdue accounts every Friday. Twenty-three days at £4,932 releases roughly £113,000, once, permanently, and it lowers the funding requirement from that point on.
Then look at what growth does to the same business. Take turnover up 30 per cent to £2.34m with the cycle unchanged. Daily revenue rises to £6,411, and eighty days of that is £513,000. The business needs roughly £118,000 of additional cash simply to stand still at the new size, before it has bought a single extra van. Nobody sends an invoice for that. It arrives quietly, as pressure.
Not every cycle has to be positive
The number can be negative, and knowing that tells you something useful about businesses that grow without funding. A supermarket sells its stock in days and pays its suppliers in weeks, so it holds customers' money before it settles its own bills. Growth generates cash rather than consuming it.
Any business can move a little way in that direction, and the moves are commercial rather than financial. Deposits on order. Staged payments on longer jobs. Monthly direct debit for recurring work instead of invoicing in arrears. Annual payment in advance with a modest discount attached. Each one shortens the gap at the point where you have the most leverage, which is before the work starts rather than after it has been delivered.
How to use it
Calculate the three numbers today
Twenty minutes with your last accounts. Most owners have never done it once, and the first calculation is usually the most valuable half hour of the quarter.
Attack debtor days first
Invoice the day the work is finished, not at month end. That single change can take a week out of the cycle before you have chased anybody.
Work the aged list, not the average
Debtor days of 68 might mean everybody pays at 68, or it might mean most pay at 30 and one large account is at 140. Those are different problems with different answers, and only the aged list tells you which one you have. Print it, take the five largest overdue balances, and call them personally.
Change terms on new work only
Deposits, staged payments, or fourteen days rather than thirty. It is far easier to set terms with a new customer than to renegotiate with an old one.
Ring-fence the tax money
VAT and PAYE are not part of your working capital, however much it looks like they are sitting in the account. Move them out the day they are calculated.
Put the number on the monthly pack
Set a target in days and report it every month. If it is not reported it will drift back within two quarters, and nobody will notice until the overdraft does.
Questions to ask yourself
- Out of ten, how confident are you that you could state your cash conversion cycle today without looking it up?
- How much cash would be released if your debtor days simply matched your own payment terms?
- If you won a contract tomorrow that added thirty per cent to turnover, where would the working capital come from?
- Who in your business is actually accountable for collecting the money, and how do they know whether they are doing it well?
- Which of the three components have you never looked at, and why is that?
Most owners do not have a profit problem. They have an eighty-day problem, and it only ever announces itself as a cash problem — usually about a fortnight too late to fix it calmly.
This is one of the core numbers in Financial Coaching, where the work is regular sessions on your own figures rather than a lecture on ratios. It sits next to The Dangers of Discounting, because price and payment terms are the two levers with no delivery cost attached, and The Ceiling of Complexity, which explains why the funding gap tends to widen at exactly the moment the business is growing fastest.
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Frequently asked questions
How do I work out my cash conversion cycle?
Three sums from your last set of accounts or your bookkeeping software, and it takes about twenty minutes. Stock days is closing stock divided by cost of sales, times 365. Debtor days is trade debtors divided by sales, times 365. Creditor days is trade creditors divided by cost of sales, times 365. Add the first two, subtract the third, and that is your cycle in days. Do it for the last three year ends as well as today, because the direction of travel matters more than the single figure. If the number has been quietly lengthening while turnover grew, you have found the reason the bank balance never reflects a good year.
Is a long cash conversion cycle always a problem?
Not automatically, but it is always a cost. A long cycle means somebody is funding the gap between your money going out and your money coming back, and in a small business that somebody is you, your overdraft or your suppliers. Some trades genuinely carry stock or work to long payment terms, and the cycle will never be short. What matters is whether you know the number, whether it is getting longer, and whether you have priced the funding it demands. A business that knows it runs at eighty days can plan for growth. A business that has never measured it discovers the number the hard way, usually a fortnight too late to fix it calmly.
Should I stretch my suppliers to shorten the cycle?
It is the first lever most owners reach for, because it is the only one that needs nobody else's agreement, and it is usually the worst one. Paying at sixty days instead of thirty shortens your cycle on paper and costs you your place in the queue, your early settlement discounts, your priority when materials are short and eventually your terms altogether. You are borrowing from the people you most need on your side, at a rate you cannot see. Work debtor days and stock days first. Those release cash you already own without damaging a relationship, and they hold, which supplier stretching never does for long.