Calculate cash conversion cycle: your three numbers.
To calculate cash conversion cycle days, add days inventory and days sales, then subtract days payables. Use the last twelve months, the last three, or even one. Then work hardest on how long you wait to be paid.
How to calculate cash conversion cycle numbers.
For days inventory, divide average stock value by what your goods cost, then multiply by the days. For days sales, divide average customer debt by credit sales, then multiply by the days. Finally, divide what you owed suppliers by goods cost, and multiply again. First plus second, minus third.
What your result probably looks like.
If you sell for cash and hold no stock, you might already be negative. However, a maker invoicing businesses should expect forty to a hundred and twenty days. Also, expect it to be worse than you guessed. So once you calculate cash conversion cycle figures, write the number down.
Getting paid sooner.
Here is how to get customers to pay faster. A 2024 survey found fifty-two per cent of small businesses struggle with late payment. First, invoice on the day and ask for part of the money upfront. Also, offering two per cent off for payment inside ten days costs two per cent and buys twenty days.
Then try moving terms from thirty days to fifteen. Factoring works, but at two per cent for thirty days it costs near twenty-seven per cent a year.
Calculate cash conversion cycle days tonight.
Pull last period's average stock, customer debts, supplier debts, goods cost and credit sales.
Run the three formulas, add the first two, subtract the third, and write it down.
From the book.
Start with how long you wait to be paid. It is the number you control most directly, and it is where small businesses bleed. A survey in 2024 found that fifty-two per cent of them struggle with customers paying late, and the research on firms that fail shows long collection periods sitting right alongside long inventory periods in the wreckage.
I Want to Start a Business but I Don't Have Money, chapter 6: The float: how to get paid before you pay
Questions about calculate cash conversion cycle.
What period should I use to calculate cash conversion cycle days?
Use the last twelve months, the last three, or just the last one if that is all you have.
Which lever should I pull first?
Start with how long you wait to be paid, because you control it most directly and small businesses bleed there.
Is factoring a good first move?
The author would not reach for it first. At two per cent for thirty days, it costs near twenty-seven per cent a year.
Read the whole chapter.
This lesson covers one section of chapter 6, “The float: how to get paid before you pay”. The book goes further, with the full evidence, the stories and every exercise.
Lessons in this chapter.
- 01 Supplier payment terms float: 37 days of free cash.
- 02 Cash conversion cycle formula: three hands on a clock.
- 03 Negative cash cycle small business: the Blanquident way.
- 04 Rathwood collapse Ireland: a profitable firm undone.
- 05 Can small business get net 90 terms: the honest answer.
- 06 Calculate cash conversion cycle: your three numbers.
- 07 Risks of spending customer deposits: six float traps.