Cash Conversion Cycle
The cash conversion cycle counts the days a company’s cash stays trapped in operations: days inventory sits, plus days customers take to pay, minus days the company takes to pay its own suppliers. It measures the gap between paying for inputs and collecting for outputs, a gap somebody has to finance continuously.
The math
A manufacturer holds inventory for 70 days and collects receivables in 25, while paying suppliers in 40: a cycle of 95 minus 40, or 55 days. Running roughly $2M of operating cost through the business daily, it keeps about $110M permanently locked in working capital.
| Days | |
|---|---|
| Inventory held | 70 |
| Receivables collected | +25 |
| Suppliers paid | -40 |
| Cash conversion cycle | 55 |
Growing revenue 20 percent means finding roughly $22M of additional cash before the new sales contribute a single dollar of profit. Flip the sign and the machine reverses: a retailer collecting instantly while paying vendors in 60 days is financed by its suppliers and generates cash simply by growing.
The trap
Earnings that grow while the cycle stretches. When receivables and inventory rise faster than revenue, the income statement can show record profits while cash quietly stalls, a pattern that precedes many blowups: channel stuffing, softening demand, and customers failing to pay all produce it.
Net income is an opinion; the cash conversion cycle sits much closer to fact.
The move
Chart the cycle across five years and set it against revenue growth. A steady or shrinking cycle during expansion signals operational control; a lengthening one demands an explanation before the position takes further damage.
Watch days sales outstanding on its own as well, since a few days of drift in collections is often the earliest warning the accounts ever publish. Then confirm with free cash flow conversion.