cash conversion cycle

The days between paying for what you deliver and getting paid for it. A negative cycle means customers finance the business.

The cash conversion cycle is the number of days between paying for the work you deliver and getting paid for it. For a business that holds stock the classic formula is days of inventory + DSO − days payable outstanding. For a service business without stock it is simpler: the day the customer pays minus the day you pay the people and suppliers who did the work.

A positive cycle means you fund your customers: you pay first and wait. Every extra unit of sales needs cash for that many days, so growth eats cash even when it's profitable. A negative cycle means your customers fund you: they pay before you pay for the work. Prepaid subscriptions and packages often run negative cycles, which is why such businesses can grow on their own cash.

The cycle depends on several levers you can actually change: whether customers prepay, how often you invoice, the payment terms you offer, and when you pay suppliers and providers. Looking at it per product line shows which parts of the business fund growth and which consume cash.

Example

Two of Klasna's lines, on average:

	16-lesson package	Teams quarter, 60-day terms
Customer pays	day 0	invoice on day 90, paid on day 150
Lessons take place	days 1–70, on average day 35	days 1–90, on average day 45
Tutor is paid, about 10 days after the lesson	day 45	day 55
Cash conversion cycle	0 − 45 = −45 days	150 − 55 = +95 days

With 30-day terms Teams would still be at 120 − 55 = +65 days. The same tutors and similar profit per lesson, but packages bring cash 45 days before the tutor is paid, while every Teams lesson waits three months for its money after the tutor has been paid.

Common mistakes

Looking only at terms. The invoice calendar adds days before the terms even start.
Averaging the whole company. A negative cycle on one line can hide a long positive one on another.
Ignoring it for profitable growth. A positive cycle means more sales need more cash, however good the margin.
Shortening it at the providers' expense. Paying people later improves the number and hurts the supply side.

Learn it in the course

Working capital: who pays whom first · Prepayments, payouts and invoices: the cash conversion cycle, working capital on one date, when negative working capital funds growth and why other lines eat cash.