Payment timing and stock determine how long cash stays tied up and how much growth the business can fund.
01 · The picture
Payment timing and stock determine how long cash stays tied up and how much growth the business can fund.
Follow the decisions
01Buy inputs
02Hold stock
03Make the sale
04Collect cash
02 · The idea
How I understand it.
The cash conversion cycle estimates the time between paying for inputs and collecting from customers. A common calculation adds inventory days to receivable days, then subtracts payable days. A shorter cycle can reduce the funding required for growth. Some business models collect from customers before paying suppliers, creating a negative cycle. Investigate slow stock, delays in sending invoices and the payment terms each party has agreed. Convert proposed improvements into a cash forecast so purchasing, hiring and delivery commitments fit the resources available. Check operational consequences: too little stock can damage availability, while longer supplier terms can raise prices or weaken a critical partner. Compare relevant peers and investigate the reasons for differences. The aim is a sustainable combination of cash timing, reliable supply and customer service.
03 · A fictional example
Put it into a business.
A bicycle retailer holds slow-selling colours for months. It reviews demand, narrows stocked variants and offers the remaining colours to order with a deposit. Inventory falls and cash arrives earlier. The team monitors lost sales and delivery times so the cash improvement does not undermine the customer experience or simply move an unreasonable burden onto smaller upstream suppliers.
04 · Bring it into the room
Where does cash wait longest in your trading cycle, and what would improving that delay allow the business to fund?
One decisionOne next actionOne way to check
Where this note comes from
An original explanation drawn from my saved learning material. The worked example is fictional.
Harvard OPM · Unit 1Course reading or session material
Finance - Dell Session Slides
Session faculty: Josh Lerner
PDF pages 2–5 and 10; Dell cash conversion cycle and contextual trade-offs
London Business SchoolCourse reading or session material
Presentation Financial Warmup YPO nc
PDF pages 14–19 and 22–25: Operating Cash Cycles; Cash Days Analysis; Self Financeable Growth
These notes collect my interpretations and applications. The schools and authors retain their original teaching materials.