Ask most owners how their business is doing and they’ll talk about sales or profit. Ask them why they’re short of cash and the honest answer is often: because everything takes too long. Stock sits. Customers pay late. Suppliers want paying now. The cash conversion cycle puts a number on that problem.
The formula
Cash conversion cycle (CCC) = stock days + debtor days − creditor days
- Stock days (DIO): how long stock sits before it’s sold.
- Debtor days (DSO): how long customers take to pay after you invoice.
- Creditor days (DPO): how long you take to pay suppliers.
The result is the number of days your own cash is tied up between paying for inputs and receiving payment for outputs.
How to calculate each part
Use figures for the same 12-month period from your accounting software.
Stock days
Stock days = average stock value ÷ cost of sales × 365
Average stock is roughly (opening stock + closing stock) ÷ 2. Service businesses with no stock can use work-in-progress instead — hours worked but not yet billed.
Debtor days
Debtor days = trade debtors ÷ credit sales × 365
Use your aged receivables total for trade debtors. If most sales are on credit, total sales is fine.
Creditor days
Creditor days = trade creditors ÷ cost of sales (or purchases) × 365
Use your aged payables total.
A worked example
A Christchurch building-supplies wholesaler:
| Figure (12 months) | Amount |
|---|---|
| Sales | $3,200,000 |
| Cost of sales | $2,240,000 |
| Average stock | $430,000 |
| Trade debtors | $395,000 |
| Trade creditors | $190,000 |
- Stock days = 430,000 ÷ 2,240,000 × 365 ≈ 70 days
- Debtor days = 395,000 ÷ 3,200,000 × 365 ≈ 45 days
- Creditor days = 190,000 ÷ 2,240,000 × 365 ≈ 31 days
- CCC ≈ 70 + 45 − 31 = 84 days
For 84 days, this business funds its own operations before cash comes back. At roughly $6,100 of cost of sales per day ($2,240,000 ÷ 365), that’s around $515,000 of working capital tied up in the cycle.
Why growth makes it worse
Here’s the trap. Suppose that wholesaler grows sales by 25% with the same cycle. Everything scales: more stock, more debtors, more creditors. The cash tied up rises by roughly 25% too — about $130,000 more working capital needed, before the extra profit arrives.
That’s why fast-growing, profitable businesses so often run short of cash, and why working capital loans and lines of credit exist.
What shortening the cycle is worth
Every day you remove frees up roughly one day of cost of sales. For the wholesaler above, that’s about $6,100 a day:
| Change | Days saved | Cash freed (approx.) |
|---|---|---|
| Debtor days 45 → 35 | 10 | $61,000 |
| Stock days 70 → 60 | 10 | $61,000 |
| Creditor days 31 → 38 | 7 | $43,000 |
| Combined | 27 | about $165,000 |
That’s cash released without borrowing a cent.
Practical ways to shorten your cycle
Reduce debtor days
- Invoice the day work is done, not at month-end.
- Offer easy payment — bank transfer details on every invoice, card or pay-by-link options.
- Take deposits on large orders or residential jobs.
- Follow up on day one of overdue, not day thirty.
Our debtor days guide has a full system.
Reduce stock days
- Identify slow movers and stop reordering them.
- Order more often in smaller quantities for predictable lines.
- Clear aged stock — cash today beats margin you’ll never realise.
- Agree consignment or supplier-held stock for bulky items.
Increase creditor days (carefully)
- Negotiate terms with key suppliers — especially if you’re a reliable, growing customer.
- Pay on the due date, not early (unless there’s a discount worth taking).
- Don’t stretch suppliers beyond agreed terms; it damages relationships and credit.
Measuring it without an accountant
Most accounting software (Xero, MYOB, others) can give you aged receivables, aged payables and stock reports in minutes. Calculate your CCC quarterly and watch the trend. If it’s creeping up, find out which part is moving.
Turning CCC into a funding number
Once you know your cycle, you can estimate how much working capital you need:
Working capital tied up ≈ daily cost of sales × CCC
For a quick version using monthly figures, our cash-flow gap calculator works from monthly outgoings, cash coming in and debtor days, and shows whether your gap is a timing issue or a trading issue.
Service businesses: the same idea, different inputs
If you sell time rather than stock, your “stock days” are really work-in-progress days — hours worked but not yet billed. An architecture practice that bills monthly in arrears, with clients paying on the 20th of the following month, can easily have a 50-day cycle with no stock at all. Billing more often, or at milestones, is the service-business equivalent of carrying less stock.
If you need to fund the gap
Timing gaps are one of the most sensible reasons to borrow. A business line of credit matches a recurring cycle; a stock funding facility suits seasonal inventory; a property-secured loan from $20,000 up to $1m can fund a larger structural gap. Start a 60-second enquiry and a lending specialist will talk through which fits.