"We sold thirty percent more than last year, but we're talking to the bank more every month." We often hear this from managers of growing businesses. The income statement looks good, yet cash is always tight. The cause is usually not profitability but timing: the gap between the day money is paid to the supplier and the day it is collected from the customer. The cash conversion cycle measures this gap in days. In this article we explain how the cycle is calculated, how it relates to growth and how to shorten it.
What is the cash conversion cycle?
The cash conversion cycle (CCC) is the average number of days between the moment a business pays for goods or raw materials and the moment that money comes back as collections after the sale. It has three components:
CCC = days inventory outstanding (DIO) + days sales outstanding (DSO) − days payable outstanding (DPO)
The components are calculated as follows (the number of days in the period is 365 for an annual calculation):
- DIO = (average inventory / cost of goods sold) × number of days
- DSO = (average trade receivables / credit sales) × number of days
- DPO = (average trade payables / cost of goods sold) × number of days
For DPO, some sources use total purchases in the period instead of cost of goods sold as the denominator; what matters is staying consistent with the method you choose.
A sample calculation
Let's take a wholesale company with sample figures (annual, TRY):
| Item | Amount |
|---|---|
| Net sales (all on credit terms) | 36,500,000 |
| Cost of goods sold | 29,200,000 |
| Average inventory | 5,600,000 |
| Average trade receivables | 7,000,000 |
| Average trade payables | 3,200,000 |
- DIO = 5,600,000 / 29,200,000 × 365 = 70 days
- DSO = 7,000,000 / 36,500,000 × 365 = 70 days
- DPO = 3,200,000 / 29,200,000 × 365 = 40 days
- CCC = 70 + 70 − 40 = 100 days
In other words, this company gets back every lira it pays its supplier after 100 days on average. What finances those 100 days is either equity or bank credit.
Why does growth drain cash?
When sales grow and the cycle stays the same, the money tied up in the cycle grows too. Roughly:
Capital tied up in the cycle ≈ daily cost of goods sold × CCC
In the example, daily COGS is about TRY 80,000; a 100-day cycle ties up about TRY 8,000,000. If sales grow by thirty percent and the cycle stays the same, the money tied up rises to about TRY 10,400,000. The TRY 2,400,000 difference never shows up on the income statement, yet it leaves the bank account. This is usually where a growing company's cash squeeze comes from.
Three levers for shortening the cycle
Inventory (DIO). Reduce slow-moving products and bring order quantities closer to demand. Details are in our article on inventory turnover.
Receivables (DSO). Review payment terms, follow up early on late-paying customers, and speed up invoicing and reconciliation. We explained how to monitor this in our article on the receivables aging report.
Payables (DPO). Negotiate terms with suppliers. But be careful: shortening the cycle by delaying payments damages supplier relationships and your reputation. The goal is to use agreed terms, not to break them.
In the example, cutting DIO and DSO by ten days each brings the cycle down to 80 days and frees up about TRY 1,600,000 (80,000 × 20).
Things to watch when calculating
The cycle is a simple formula, but if the inputs are chosen poorly it gives misleading results. These are the four points we run into most often:
- Use averages, not period-end balances. Inventory deliberately reduced at year-end, or collections pushed through, make the cycle look shorter than it is. The average of monthly balances is more realistic.
- Separate cash sales. If cash sales go into the denominator of DSO, the collection period looks shorter than it is. Use only credit sales if possible.
- VAT consistency. Receivable and payable balances usually include VAT, while sales and cost figures exclude it. Keep this difference in mind when interpreting the ratios, or make them consistent.
- Look at the trend, not a single number. A quarter at 100 days isn't good or bad on its own; if it has risen from 85 to 100 days, that's the real message.
Checklist
- Are DIO, DSO and DPO calculated at least quarterly?
- Are the same number of days and the same definitions used in every calculation?
- Is the cycle's trend over the last three years known?
- When planning for growth, was the extra capital that will be tied up in the cycle calculated?
- Is there an owner and a target for each of the three components?
- Does the cash forecast reflect changes in the cycle?
How we do it at Globya
READERP comes with a ready-made Cash cycle view: it connects read-only to Netsis and Logo, the ERP systems widely used in Türkiye, and to other common ERP and finance platforms; it never writes a single line to the ERP and is set up the same day. Because it combines fiscal-period databases into a single time series, you can also see how the cycle has moved over the years. You can ask questions like "How much longer has our collection period become compared with last year?" in plain Turkish. To track the cycle's short-term effect on cash, our article on weekly cash flow forecasting is a good complement.
Frequently asked questions
Can the cash conversion cycle be negative?
Yes. In businesses that sell for cash and pay suppliers on credit terms, the cycle can be negative; in that case suppliers are effectively financing the business. This is seen in retail and some e-commerce models.
How many days is considered good?
It varies a lot by industry. Long cycles are normal in manufacturing and wholesale distribution, short ones in retail. The most meaningful comparison is with the company's own history.
Does profit increase when the cycle gets shorter?
It doesn't change the income statement directly, but it reduces the need for financing. Using less credit lowers interest expense and so indirectly contributes to profitability.
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