Your Business Might Be Sitting on More Cash Than You Think. Let’s Find It.

I enjoy a good financial surprise.

Preferably the kind where we discover money we didn’t realize we could put to better use.

Not the kind where someone announces a $75,000 expense that apparently everybody knew about except Finance.

Those are less festive.

But here’s something I find genuinely interesting about growing businesses.

Sometimes the business doesn’t need to sell more, borrow more, or cut expenses to improve its cash position.

Sometimes it needs to get better at moving money through the business.

And that’s where I start looking at the cash conversion cycle.

It sounds like one of those finance terms that requires a certification, three spreadsheets, and a very serious expression.

It doesn’t.

It’s actually a useful way to answer a simple question:

How long does your business have to wait to get its money back?

Because there’s a surprising amount of cash hiding in the time between buying something, selling it, and getting paid.

Let’s go looking for it.

What Is the Cash Conversion Cycle?

The cash conversion cycle, or CCC, measures how many days a business’s cash is tied up in inventory and customer receivables, after accounting for the time suppliers allow before payment.

In plain English, it looks at three things:

• How long inventory sits before it’s sold.
• How long customers take to pay.
• How long the business takes to pay its suppliers.

Put those together, and you get a picture of how long the company is effectively financing its operating cycle.

Here’s the formula:

Cash Conversion Cycle = DIO + DSO − DPO

Those abbreviations mean:

DIO: Days Inventory Outstanding — how long inventory is held.

DSO: Days Sales Outstanding — how long it takes to collect from customers.

DPO: Days Payable Outstanding — how long the business takes to pay suppliers.

The formula is standard working-capital analysis. The Association for Financial Professionals also explains how these three measures work together.

I think of the cash conversion cycle as a financial relay race.

You buy inventory.

Inventory becomes a sale.

The sale becomes a receivable.

The receivable eventually becomes cash.

And somewhere along the way, suppliers expect to be paid.

Very reasonable of them.

The goal isn’t necessarily to make every stage happen at record speed.

It’s to understand where time is being lost, where money is getting tied up, and which changes are worth making.

Let’s Meet a Business With $1.2 Million in Inventory

Imagine a hypothetical wholesale distributor.

Business is going well.

Customers are ordering.

Revenue is growing.

The warehouse is busy.

Everyone is pleased with the sales numbers.

But the owner keeps wondering why so much money seems to be tied up in operations.

Here are the company’s hypothetical annual figures:

Financial metric	Amount
Annual credit sales	$7,300,000
Annual cost of goods sold	$4,380,000
Average accounts receivable	$900,000
Average inventory	$1,200,000
Average trade accounts payable	$600,000

For simplicity, I’m using a 365-day year, stable annual activity, and average beginning-and-ending balance-sheet amounts.

Real businesses can be seasonal, and averages can hide important changes. We’ll come back to that.

First, let’s see what these numbers tell us.

Step 1: Find Out How Long Inventory Is Waiting Around

Days Inventory Outstanding tells us approximately how many days of cost of goods sold are sitting in inventory.

The formula is:

DIO = Average Inventory ÷ Cost of Goods Sold × 365

For our distributor:

$1,200,000 ÷ $4,380,000 × 365 = 100 days

So the business is holding approximately 100 days of inventory.

Is that good?

Maybe.

I know. Not the dramatic answer everyone was hoping for.

But a hundred days of inventory could be perfectly reasonable for a company dealing with long supplier lead times, seasonal demand, or specialized products.

For another business, it could be an expensive collection of things nobody wants.

That’s why I wouldn’t immediately declare that inventory needs to be cut.

I’d want to know what we’re holding.

Which products move quickly?

Which ones haven’t sold in months?

Which items are essential for customer service?

And which ones are quietly enjoying a very comfortable retirement in the back of the warehouse?

The number tells me where to look.

It doesn’t make the decision for me.

Step 2: Find Out How Long Customers Take to Pay

Next is Days Sales Outstanding.

This measures approximately how many days of credit sales are tied up in accounts receivable.

The formula is:

DSO = Average Accounts Receivable ÷ Annual Credit Sales × 365

Our distributor has $900,000 in average receivables and $7,300,000 in annual credit sales.

$900,000 ÷ $7,300,000 × 365 = 45 days

Customers take about 45 days to pay, on average.

Now I’m interested.

Are the company’s terms net 30?

Net 45?

Net 60?

Because 45 days means something very different depending on what customers actually agreed to.

If the company offers net-45 terms and most customers pay as expected, that may be entirely normal.

If terms are net 30 and invoices routinely take 45 days to collect, we have something worth investigating.

Maybe invoices are going out late.

Maybe customers are disputing charges.

Maybe nobody is following up until the receivable is old enough to vote.

Whatever the reason, I would rather understand it than simply tell the collections team to work harder.

If you want to examine the timing in more detail, I’ve also written about forecasting accounts receivable collections.

Step 3: See How Much Time Suppliers Are Giving Us

Now for Days Payable Outstanding.

This measures how long the company takes to pay its trade suppliers, using cost of goods sold as the denominator.

DPO = Average Trade Accounts Payable ÷ Cost of Goods Sold × 365

For our example:

$600,000 ÷ $4,380,000 × 365 = 50 days

So the business is paying suppliers after approximately 50 days.

Again, that number needs context.

If the company has agreed net-60 terms, paying in 50 days may mean it’s paying earlier than necessary.

If the company has net-30 terms, paying in 50 days may mean something quite different.

And before anyone gets too excited about stretching payables, I’d like to point out that suppliers are people we generally want to keep answering the phone.

Especially when we need inventory.

Negotiating sensible terms can improve cash flow.

Simply paying late without agreement can damage relationships, eliminate discounts, interrupt supply, and create more problems than it solves.

I prefer the first approach.

Less exciting, perhaps.

Also less likely to involve someone from Purchasing calling Finance in a panic.

Step 4: Calculate the Cash Conversion Cycle

We now have our three numbers.

Component	Days
Days Inventory Outstanding	100
Days Sales Outstanding	45
Days Payable Outstanding	50

Our formula is:

CCC = 100 + 45 − 50

Cash Conversion Cycle = 95 days

That means the company is effectively funding about 95 days of its inventory-and-collections operating cycle after allowing for supplier credit.

For a business with $7.3 million in annual credit sales, that’s worth understanding.

But I wouldn’t stop at 95 days.

Not even close.

Because the interesting question isn’t simply how long the cycle is.

It’s what we could improve.

And how much cash that improvement might release.

Here’s Where the Math Gets Interesting

Let’s imagine the company makes three operational improvements.

It reduces average inventory holding time from 100 days to 90.

It improves customer collections from 45 days to 40.

And it negotiates supplier terms that increase payable days from 50 to 55.

The new cash conversion cycle becomes:

90 + 40 − 55 = 75 days

That’s a 20-day improvement.

Lovely.

But I can practically hear someone asking:

“Sarah, how much money is that?”

An excellent question.

And this is where I want to be careful.

Because we cannot simply multiply all 20 days by one daily sales figure and declare victory.

Inventory, receivables, and payables are measured using different financial bases.

If we’re going to put a dollar amount on this, we need to respect that distinction.

Improvement 1: Ten fewer days of inventory

Annual cost of goods sold is $4,380,000.

Daily cost of goods sold:

$4,380,000 ÷ 365 = $12,000

Reducing inventory by 10 days would release approximately:

10 × $12,000 = $120,000

That’s $120,000 no longer tied up in average inventory, assuming the improvement is sustainable and the cost structure remains stable.

Improvement 2: Five fewer days waiting for customers

Annual credit sales are $7,300,000.

Daily credit sales:

$7,300,000 ÷ 365 = $20,000

Reducing DSO by five days would release approximately:

5 × $20,000 = $100,000

This is a reduction in receivables, not additional revenue.

The company already made those sales.

It’s simply collecting the money sooner.

A distinction I find rather important.

Improvement 3: Five additional days of agreed supplier credit

Daily cost of goods sold is still $12,000.

If suppliers agree to extend the company’s effective payment timing by five days:

5 × $12,000 = $60,000

That’s approximately $60,000 of additional supplier financing.

Notice that I said agree.

We’re negotiating terms, not inventing our own payment calendar and hoping nobody notices.

What does that add up to?

Improvement	Estimated cash released
Reduce inventory by 10 days	$120,000
Reduce receivables by 5 days	$100,000
Extend agreed payables by 5 days	$60,000
Total estimated working capital release	$280,000

Two hundred and eighty thousand dollars.

From operational improvements.

Without assuming the company sells another product.

Without raising prices.

Without borrowing more money.

And without holding an emergency meeting about the office coffee budget.

Now, before we start planning what to do with it, I want to explain what that number actually means.

That $280,000 Is Not Additional Profit

I would put this sentence in bold on the management presentation.

Possibly twice.

Releasing working capital improves cash availability. It does not automatically increase profit.

Our hypothetical company is reducing money tied up in inventory and receivables while using more agreed supplier credit.

That’s a balance-sheet improvement.

It can provide cash to support operations, fund investments, reduce borrowing, or build a reserve.

But it’s not $280,000 of newly earned income.

And it’s generally a one-time release from moving to a lower working-capital level, not $280,000 that magically appears every year.

The benefits can persist if the company maintains those improved operating conditions.

If the business continues growing, though, it may still need more working capital as activity expands.

This is why I like connecting cash conversion cycle analysis to a broader working capital forecast.

The improvement tells us what might be released.

The forecast helps us understand when that cash could become available and whether other needs will absorb it.

Those are related questions.

They are not the same question.

Which Improvement Would I Actually Make First?

Here’s where I think the financial analysis becomes useful.

We have three opportunities.

But that doesn’t mean we should immediately pursue all three.

I’d evaluate them by asking how much cash each might release, how achievable the change is, how long it will take, and what operational consequences it could create.

For example, reducing inventory by ten days sounds attractive.

But what if it causes stockouts on the company’s most profitable products?

Suddenly our $120,000 opportunity looks a little less wonderful.

Improving collections by five days might be easier.

Perhaps the company could send invoices sooner, resolve disputes faster, and improve follow-up on overdue balances.

That could release $100,000 without changing customer payment terms.

I like that possibility.

And negotiating longer supplier terms could be useful, provided the company isn’t giving up discounts or jeopardizing supply in exchange.

I’d start with the least disruptive improvement that produces meaningful cash

For this hypothetical distributor, I’d probably investigate collections first.

Not because collections always wins.

Because it might offer a meaningful benefit with relatively limited disruption.

Then I’d examine slow-moving inventory.

After that, I’d review supplier terms.

The exact order could change after we understand the operational details.

That’s the part of FP&A I enjoy.

The calculation gives us options.

Judgment helps us choose.

Why a Shorter Cash Conversion Cycle Isn’t Always Better

I want to resist turning this into a competition to see who can achieve the smallest number.

A shorter cash conversion cycle can be a good thing.

But it isn’t automatically better under every circumstance.

Imagine reducing inventory so aggressively that the company starts missing orders.

Or shortening customer terms in a way that drives good customers toward competitors.

Or stretching suppliers until they stop offering favorable pricing.

Congratulations.

We’ve improved a ratio and potentially damaged the business.

That would be a rather expensive trophy.

I would compare the cash benefits with the effects on revenue, margins, service levels, supplier reliability, and operating risk.

I’d also compare the company’s performance with its own historical results and relevant industry peers.

A retailer collecting cash at the register has a very different operating model from a manufacturer with long production cycles.

Comparing their cash conversion cycles without context tells us remarkably little.

What If Your Business Doesn’t Hold Inventory?

The standard cash conversion cycle is especially useful for businesses that carry inventory and sell on credit.

Manufacturers.

Distributors.

Wholesalers.

Certain retailers.

But service businesses can also have significant cash timing issues.

They may pay employees and contractors weeks before customers pay their invoices.

They may have unbilled work in progress or contract assets.

And their supplier-payment structure may look nothing like a distributor’s.

If there’s little or no inventory, DIO may be zero or close to it, but that doesn’t mean the company’s cash needs disappear.

For a service business, I’d often focus more directly on billing milestones, unbilled work, collection timing, payroll, and the short-term cash forecast.

I wouldn’t force an inventory-based metric onto a business that doesn’t operate that way.

Finance has enough unnecessary complications without us volunteering to create more.

How I’d Use This Analysis in a Real Business

I’d begin with a clean set of financial information for a consistent period.

I’d calculate average trade receivables, inventory, and trade payables using beginning and ending balances, or more frequent averages when seasonality makes a simple average misleading.

I’d use net credit sales for DSO and the appropriate cost basis for DIO and DPO.

Then I’d calculate the three components and the overall cycle.

But I wouldn’t just produce one number.

I’d look at the trend.

Is inventory taking longer to sell?

Are customers paying more slowly?

Have supplier terms changed?

Is the business growing faster than its cash can support?

Then I’d translate reasonable changes in each component into estimated cash effects, just as we did in the example.

Finally, I’d work with the people who actually influence those numbers.

Sales and accounts receivable for collections.

Operations and Purchasing for inventory.

Procurement and accounts payable for supplier terms.

Finance can calculate the opportunity.

The business has to deliver it.

And I’d check the actual cash impact afterward rather than assuming a better ratio automatically produced the forecast benefit.

There’s Something Encouraging About Finding Cash You Already Earned

I like this kind of analysis because it changes the conversation.

Instead of immediately asking how much more revenue the business needs, we can ask whether the money already moving through the company is being used efficiently.

Maybe the answer is that the business genuinely needs financing.

Maybe growth requires additional inventory or a larger cash reserve.

That’s entirely possible.

But perhaps there are opportunities to improve collections, reduce slow-moving stock, or negotiate better supplier terms before adding more borrowing.

Those are worth finding.

And unlike a revenue target that depends on future customers making future decisions, some of these improvements may be substantially within the company’s control.

Not all of them.

But enough to make the exercise worthwhile.

The cash conversion cycle isn’t a magic trick.

It’s a way to make the timing of your business visible.

And sometimes visibility is exactly what we need to find the next good decision.

Curious How Much Cash Your Business Could Free Up?

If you’re looking at strong sales and wondering why cash still feels tighter than it should, I’d be interested in what the numbers are doing between the sale and the bank deposit.

My Cash Forecasting services can help connect those operating assumptions to a more useful picture of future cash needs.

Because before we decide the business needs more money, I think it’s worth finding out what happened to the money that’s already there.