The Cash Conversion Cycle

Receivable days

Receivables ÷ revenue × 365 — on average, how many days of sales value is sitting unpaid in customers’ hands.

In the worked series: 40 days, falling to 39, 38, 38 and 37. Falling is good news — customers paying faster relative to the scale of sales means less cash locked up waiting to be collected.

Inventory days

Inventory ÷ cost of goods sold × 365 — how many days’ worth of production cost is sitting in the warehouse, unsold.

In the same series: 58 falling to 57, 56, 55 and 55. Again encouraging — less cash tied up in unsold stock, relative to the pace of sales.

Payable days, where falling is the worse direction

Payables ÷ cost of goods sold × 365 — how many days the company itself takes to pay its own suppliers.

In the series: 48 falling to 47, 47, 46 and 46. Here falling is the less favourable direction on pure cash timing — paying suppliers sooner uses cash sooner, rather than holding it longer.

This is why reading the three in isolation misleads. Which direction counts as “good” depends on which side of the working-capital triangle you are standing on.

The cash conversion cycle nets all three

Receivable days + inventory days − payable days — the net number of days cash is tied up in the full operating cycle, from paying for inputs to collecting from customers.

In the worked example: 50 days, falling steadily to 49, 47, 47 and 46. Two components pulling in the cash-favourable direction outweigh one pulling the other way, and the single combined measure confirms it — cash is coming back out of the operating cycle slightly faster each year.

Why this matters most for a growing business

Growth normally consumes cash. More revenue typically means more receivables and more inventory sitting on the balance sheet at any moment, even if every customer pays on exactly the same schedule as before.

So a falling cash conversion cycle during a growth phase means the business is actively working against that natural cash drag — growing revenue while becoming more efficient at converting it to cash, not merely getting bigger. A rising cycle during growth is the warning pattern: more sales, more profit on paper, and progressively less cash to show for it.

Common mistakes

• —Reading “falling days” as universally good without separating payables from the other two.
• —Using revenue rather than cost of goods sold in the inventory and payable day calculations.
• —Comparing cycles across industries with structurally different stock and credit norms.
• —Celebrating a shrinking cycle achieved only by stretching suppliers to breaking point.