Cash conversion cycle: why profitable businesses run out of cash
Profit is an opinion; cash is a fact. The cash cycle shows where the gap comes from.
Every rupee of sales goes on a journey: you buy stock, hold it, sell it on credit, wait to be paid, and only then see the cash. The cash conversion cycle measures that journey in days.
The three parts
- Inventory days (DIO): how long stock sits before it is sold.
- Receivable days (DSO): how long customers take to pay.
- Payable days (DPO): how long you take to pay suppliers.
The cycle is DIO plus DSO minus DPO. A distributor with 61 days of stock, 55 days of debtors and 43 days of creditors has a 72-day cycle.
Why growth makes it worse
If the cycle is 72 days and sales grow by ₹10 lakh a month, you need roughly 72 days’ worth of that extra cost tied up before any of it comes back. Growth eats cash before it produces it. That is how a business can show rising profits and an emptying bank account at the same time.
What moves it fastest
- Collections: a weekly call list for the 31–60 day bucket usually cuts DSO by a week within two months.
- Slow stock: clear items older than 90 days, even at a small loss, and stop reordering them.
- Supplier terms: ask for 15 more days in exchange for a steady order schedule.
Run your own numbers in the working capital calculator to see how much cash a 15-day cut would free.