The cash conversion cycle, and why it decides your borrowing

Ask most owners how much working capital the business needs and you get an estimate. The number is calculable, it takes ten minutes, and it changes how you think about growth.

The calculation

Three figures, each converted to days.

Receivable days. Closing receivables ÷ annual revenue × 365. How long customers take to pay.

Inventory days. Closing inventory ÷ annual cost of goods sold × 365. How long stock sits.

Payable days. Closing payables ÷ annual cost of goods sold × 365. How long you take to pay suppliers.

Then: receivable days + inventory days − payable days = cash conversion cycle.

That is the number of days between money leaving your business and money coming back. It is the period you are financing, every cycle, out of your own capital or someone's borrowing.

Reading the result

A business with a cycle of ninety days finances three months of its own operations continuously. Grow revenue by half and that funding requirement grows by half too, before any capital expenditure, before any hiring.

This is the arithmetic behind the most common surprise in a growing business: the order book is full, the accounts show profit, and the bank balance is falling.

A negative cycle, where you collect before you pay, means growth generates cash rather than consuming it. Some retail and subscription models achieve this. Most B2B businesses do not, and should not expect to.

What to do with the number

Use it to size your facility

Your working capital requirement is roughly your daily cost of sales multiplied by the cycle length. A business turning over meaningful revenue with a ninety-day cycle needs a facility scaled to that, not to a figure picked in a meeting. Banks respond considerably better to a request built this way.

Use it to forecast the cost of growth

Before committing to a growth plan, calculate what the cycle will consume at the new revenue level. If that exceeds available cash and facility, the plan needs funding attached to it, and it is much better to know that before the hiring than after.

Use it to find the cheapest improvement

Each component responds to different action:

• Receivable days, invoicing promptly, chasing from day one, deposits on large orders, terms that reflect the risk
• Inventory days, ordering discipline, identifying slow-moving stock, supplier lead times
• Payable days, negotiated terms, though note the constraints where suppliers are registered micro or small enterprises

Ten days off receivables is usually the cheapest and fastest of the three, and it is almost always available. It is mostly a process change rather than a commercial one.

Track it monthly, not annually

An annual figure tells you what happened. A monthly series tells you what is happening, and the direction is more informative than the level. A cycle lengthening three months in a row is a warning well before it becomes a cash problem.

The comparison worth making

Compare your cycle against the same month last year rather than against an industry benchmark. Benchmarks are averages of businesses with different models. Your own trajectory is the meaningful comparison, and it is the one you can act on.

Why this is the number to start with

If you were to instrument only one thing beyond the statutory accounts, this would be it. It explains the gap between profit and cash, it sizes your funding need, it points at which operational lever to pull, and it gives early warning. Four useful things from three figures you already have.