Deep-dive guide
Cash Conversion Cycle Simulator: How Many Days Is Your Cash Stuck in Stock?
Executive industry analysis
A business can be profitable and still run out of cash. The reason is timing. You pay suppliers, then goods sit in stock, then they sell, and then customers or marketplaces pay you. Each of those steps takes days, and for all those days your money is working for the cycle instead of for you. The cash conversion cycle counts the days between paying for goods and getting paid for them. It is one of the clearest measures of how hard a company's working capital is working.
The cycle has three parts. Days of inventory outstanding measures how long goods wait before they sell. Days sales outstanding measures how long you wait for customer payment after a sale. Days payable outstanding measures how long you take to pay your own suppliers. The cycle is the first two added together, minus the third. A long stock period or a slow payout lengthens the cycle. A long supplier term shortens it. A short cycle means the business is funded largely by its suppliers.
The domino model follows the cash. The length of the cycle decides how much cash is locked in inventory and receivables, less what you owe suppliers. That locked cash has a price, the interest or lost return on the money that funds it. The financing cost then takes a share of gross profit, and that share decides how much of the sales margin survives as monthly profit. A longer cycle at high interest rates can turn a healthy gross margin into a thin or negative profit without any change in selling price.
The iceberg shows costs that grow with the cycle. Above the waterline are operating expenses and the interest itself. Below it are three that usually sit in other lines: storage, insurance and shrink on the stock you hold; bad debt, which rises with the days you wait to collect; and early-payment discounts you give up when you pay suppliers late or sooner than needed. Use the simulator to find how many days of stock, collection or supplier credit move the result, and then decide which of the three levers is cheapest to pull.
Formula and methodology blueprint
The model works per month. Inventory equals monthly cost of goods times days of inventory divided by thirty. Receivables equal monthly revenue times days sales outstanding divided by thirty. Payables equal monthly purchases, assumed to be the cost of goods, times days payable divided by thirty. The cash locked is inventory plus receivables minus payables. Financing cost is that cash times the annual rate divided by twelve. Operating expenses are a fixed share of revenue.
- Cash conversion cycle
- CCC = DIO + DSO − DPO
- Days from paying suppliers to receiving cash from customers.
- Inventory
- Inventory = COGS × DIO ÷ 30
- Cash tied up in stock, valued at cost.
- Receivables and payables
- AR = revenue × DSO ÷ 30; AP = COGS × DPO ÷ 30
- What customers owe you and what you owe suppliers.
- Financing cost
- Interest = (Inventory + AR − AP) × rate ÷ 12
- The monthly price of the cash locked in the cycle.
- Net profit
- Net = revenue − COGS − opex − interest − holding − bad debt − missed discount
- The monthly result. The breaking point is where this reaches zero.
Cascading elasticity
Days of inventory and cost of goods are the most elastic inputs, because inventory is the largest part of the locked cash and is valued at cost. Days sales outstanding act on revenue, which is larger than cost, so each day of collection locks more cash than a day of stock does per unit of sales. Cost of capital multiplies all of it, which is why a rate rise hurts a long cycle far more than a short one.
Three real-world case studies
Bootstrapped starter
A small seller with lean stock
A new seller with fifteen thousand in monthly sales holds about forty-five days of stock, is paid within days and pays suppliers in about a month. The cycle is short and the cash locked is modest. Loading it shows how a lean start keeps financing cost small.
Scaling mid-market
A scaled seller funded by suppliers
A scaled seller with three hundred thousand in monthly sales turns stock in about two months, collects quickly and holds suppliers to forty-five days. Cheap financing and strong terms keep the cycle short. Loading it shows how supplier credit funds growth.
Black-swan crisis
A stalled stock and slow payers
A seller holds almost six months of stock, waits nearly two months for customers and must pay suppliers in ten days. Financing is expensive. The cycle is far over two hundred days. Loading it shows how a long cycle turns real sales into a loss.
Industry benchmark matrix
| Metric | Danger zone | Industry average | Top 10% elite |
|---|---|---|---|
| Days of inventory (online retail) | Above 120 | 45–90 | Below 40 |
| Days sales outstanding (marketplace and card payouts) | Above 45 | 7–21 | Below 5 |
| Days payable outstanding | Below 15 | 30–45 | Above 60 |
| Cash conversion cycle | Above 120 days | 30–75 days | Zero or negative |
| Financing cost as share of gross profit | Above 15% | 4–8% | Below 3% |
Variables and levers
Monthly revenue
Sales invoiced in a normal month.
Lever: Grow sales on the same working capital by speeding up stock turns, because revenue spreads the fixed financing cost.
Cost of goods (COGS)
Share of revenue spent on the goods you sell; purchases are assumed to equal this.
Lever: Improve purchase prices and mix; a lower cost of goods shrinks both the stock you hold and the cash you owe suppliers.
Days of inventory (DIO)
Average days a unit sits in stock between purchase and sale.
Lever: Cut slow lines, reorder in smaller lots and sell down dead stock, since every day of stock is cash sitting on a shelf.
Days to collect (DSO)
Average days between a sale and the money arriving, such as marketplace payout or invoice terms.
Lever: Shorten payout terms, ask for deposits and chase overdue invoices early, because each day of delay locks revenue.
Days to pay suppliers (DPO)
Average days you take to pay suppliers after receiving goods.
Lever: Negotiate longer supplier terms in exchange for volume, as long as you do not give up a larger early-payment discount.
Cost of capital per year
Interest on the borrowing that funds your working capital, or the return you give up.
Lever: Refinance expensive short-term debt and compare it with supplier credit, since the same locked cash costs far more at a high rate.
How to use this simulator
- 1Enter monthly revenue and the share of it spent on goods.
- 2Enter your days of inventory, days to collect and days to pay suppliers from your latest accounts.
- 3Enter the interest rate on the borrowing that funds your working capital.
- 4Read the cycle length, the cash locked and the share of gross profit lost to financing.
- 5Compare the current cycle with the tightening plan in the Parallel universe tab.
Mistakes to avoid
- Watching profit and ignoring cash. A growing, profitable business can run out of money if its cycle is long, because growth needs more stock and more receivables.
- Stretching supplier payments without checking terms. Late payment can cost discounts, relationships or supply, and the saving can disappear.
- Treating stock days as one number. Fast sellers and dead stock sit under the same average, and the average can hide a pile that should be cleared.
- Using the average cost of capital for a one-off need. Short-term borrowing during a crunch can cost far more than the rate you plan with.
Frequently asked questions
Can the cash conversion cycle be negative?
Yes. If you collect before you pay suppliers, suppliers fund your operation. Some fast-turning retailers run a negative cycle, and the model then shows a financing gain.
Why are purchases assumed equal to the cost of goods?
For simplicity. If you are growing stock or shrinking it, purchases differ from cost of goods in that month, so use your real purchase figures when you can.
Is a longer supplier term always better?
Not always. A supplier may offer an early-payment discount that is worth more than the credit. The model counts a forgone discount when you pay before the thirty-day term.
How should I treat tax and customs timing?
Taxes, duties and VAT can change the timing of cash. They are not modelled here, so check current rules and add them to your own forecast.
How do I find my breaking point?
Press Find my breaking point. The tool pushes each input to its worse end and reports where monthly profit reaches zero, ranked by how near each one is.
How accurate is this?
It is an educational planning model, not financial advice. Use your own balance sheet averages, and compare the results with your accountant's figures.
This is an educational planning model with stated assumptions. It is not financial, tax or legal advice. Replace the inputs with your own figures and verify important decisions with a qualified professional.