Profit is an opinion; cash is a fact. A company can report healthy margins and still struggle to pay suppliers, because the money it earns is tied up in invoices that customers have not paid and in stock that has not been sold. Working capital is often the cheapest source of funding a business has, and one of the most neglected.
Three numbers tell the whole story
- DSO, days sales outstanding: how many days, on average, customers take to pay.
- DIO, days inventory outstanding: how many days stock stays in the warehouse before it is sold.
- DPO, days payables outstanding: how many days the company takes to pay its suppliers.
The cash conversion cycle is DSO + DIO − DPO: the number of days between paying for inputs and collecting from customers. Every day of that cycle has to be financed, by the shareholders or by the bank.
In this example the company collects in 62 days, holds 75 days of stock and pays in 41, a cycle of 96 days. Bringing collection to 50 days, inventory to 60 and payments to 50 shortens it to 60 days. With annual sales of 120 million, each day is worth about 0.33 million, so 36 days release close to 12 million in cash, as a simple approximation, without a single new sale.
Levers that work
Collect faster
Invoice on time and without errors, segment customers by payment behaviour, agree on clear terms and follow up before the due date, not after. Disputed invoices are often the largest hidden source of late payment.
Hold less stock
Separate fast movers from slow ones, set safety stock by the service level each item really needs and clean out obsolete inventory. Better forecasts reduce stock more sustainably than across-the-board cuts.
Pay on terms, not early
Many companies pay early by habit or because approval flows are inconsistent. Aligning payments to the agreed terms is not squeezing suppliers; for critical suppliers, supply chain finance can extend terms while they are paid early by a bank.
Bartor S.
Founder
