Cash Conversion Cycle: a Worked Example

The cash conversion cycle is the number of days a company's own cash is trapped between paying for inputs and collecting from customers:

Debtor days: how long customers take to pay. Inventory days: how long stock sits before it sells. Payables days: how long the company takes to pay its own suppliers — subtracted, because during those days the suppliers are funding the business. The result is the length of the gap the company has to finance out of its own cash or a bank facility, every day, at whatever size it currently trades. The glossary entry defines the term the way a credit desk uses it; this page runs the actual numbers.

Take a food distributor — constructed for this page, like every figure on this site — with revenue of NZ$20.0m. Customers pay in 47 days, stock turns in 63, suppliers are paid in 34:

That NZ$4.16m is not a forecast and not a ratio — it is the cash this business has standing in the gap between paying and collecting, at today's size, on today's terms. It is the number a working capital limit exists to fund.

Two years later, revenue has grown to NZ$26.0m — up 30%, a good story. But the terms have drifted: debtors 52 days, inventory 70, payables 31.

The business now carries roughly NZ$2.3m more working capital than it did two years ago. The decomposition is the part a lender actually reads: had the cycle held at 76 days, growth alone would have absorbed about NZ$1.25m — the honest cost of a bigger business. The other NZ$1.07m is the drift from 76 to 91 days: slower collections, heavier stock, less supplier patience. Half the absorption is growth. Half is deterioration wearing growth's clothes.

Now suppose this borrower asks for a NZ$1.5m increase to the facility. The arithmetic makes the request legible before a single meeting: NZ$2.3m has already been absorbed, so the request is not funding the future — it is catching up with the past, and it is not even the whole of it. The conversation that follows is not “yes or no to NZ$1.5m” but “which half of the absorption are we financing — the growth, or the drift?” Fund the first willingly. The second, the borrower should be fixing, not funding.

The level of the cycle mostly reflects the business model. The movement reflects management, and each component moves for its own reasons. Debtor days lengthening can be growth into slower-paying customers, a large customer imposing terms, or collections quietly losing discipline — three different conversations. Inventory days lengthening can be a deliberate build for a season or contract, or stock that has stopped selling and not yet been admitted to. Payables days shortening — suppliers tightening terms — is one of the quietest early warnings in the set, because suppliers often read distress before banks do.

This is why a credit desk never reads the cycle as one number. The same 91 days made of clean growth and negotiated terms is a financing request; made of drift on all three lines, it is a management question the facility increase would only postpone.

The cycle's real work is catching the most seductive pattern in commercial lending: revenue up, profit up, cash quietly gone. Growth absorbs working capital arithmetically — every extra dollar of revenue carries its share of the cycle — so a growing business can be profitable on paper and starving in the bank account, and the facility request that follows looks like success right up until the numbers are run.

The two published files that work this pattern from opposite ends: Issue 01, where the request is roughly half the absorption already in the numbers and the senior read is to decline as framed, and Issue 04, its mirror — the same request shape where the cycle held, the arithmetic supports it, and the disciplined answer is a fast, full yes. The pair is the point: the cycle does not make lenders cautious. It makes them accurate.

The Three Diagnostics calculator runs this reading — growth quality, cash conversion, and the trend in the cycle — against twelve numbers you enter yourself, and returns a senior banker's written read rather than a score. The full reading order it belongs to is worked across two opposite cases in the working capital case study, and from the borrower's side of the table in How Banks Read You.