- The cash conversion cycle measures how long cash is unavailable.
- Receivables are usually the largest and most addressable component.
- Paying early is a hidden cost; paying late is a hidden risk.
- Prepaid annual costs are working capital decisions in disguise.
- Small improvements in collection have large cash effects.
The cash conversion cycle
The cycle is the time between paying for something and being paid for what you did with it. Longer cycles mean more cash tied up at any moment, and growth multiplies that requirement.
Each component is measurable and each responds to different interventions, which is why measuring them separately is worth the effort.
- Days sales outstanding — how long customers take to pay.
- Days inventory outstanding — how long stock sits before sale.
- Days payable outstanding — how long you take to pay suppliers.
Receivables: the biggest lever
For most service businesses, receivables dominate working capital. The improvements available are unglamorous and reliably effective — most companies have never systematically worked through them.
- Invoice the day the work is complete, not at month-end.
- Confirm the invoice reached the right person before terms start running.
- Chase systematically on a schedule rather than when someone remembers.
- Make payment easy: correct details, clear references, sensible methods.
- Escalate early and politely; late invoices get harder to collect over time.
Payables without damaging relationships
Paying on terms is neutral and expected. Paying early costs cash for no return unless a genuine discount applies. Paying late improves cash short-term and damages relationships permanently.
Negotiating longer terms at contract signature is almost always better than taking them unilaterally afterwards, and it is a conversation most suppliers will have.
Prepayments and annual contracts
Annual prepayment discounts are usually presented as savings. They are also a working capital decision: paying twelve months up front for a ten per cent discount means financing the vendor for a year.
Whether that is worthwhile depends on the value of that cash to you. For a company with tight cash, monthly payment at a higher headline rate is frequently the better decision.
Frequently asked questions
It varies by business model — subscription businesses collecting in advance can run negative cycles, while project businesses often run long ones. Compare against your own trend rather than a benchmark from a different model.
Only if the cash is worth more to you than the discount costs. A two per cent discount for paying twenty days early is an expensive form of financing when annualised.
Card settlement is a predictable outflow on a fixed cycle, which makes it easy to model — but it is not a financing tool. See cash management.
Keep reading
Sources and further reading
Every factual statement on this page is checked against primary documentation. Terms change frequently, so confirm details with the provider before acting on them.
- FASB Accounting Standards Codification Reference point for accrual, expense recognition and close-process statements.
- Nacha — ACH Network rules and resources Used for statements about ACH timing and payment rails.
- Consumer Financial Protection Bureau — credit card resources Background on card terminology, billing cycles and consumer-vs-commercial distinctions.