STRATEGIC CFO / CASH FLOW & WORKING CAPITAL
The income statement shows profit. Where is the cash?
Use the cash conversion cycle to locate cash tied up in receivables, inventory and payables, then translate the findings into decisions and a cash forecast.
Sales rise and profit looks healthy, yet payroll and supplier payments arrive before customers pay. Management feels the pressure without always seeing its cause. Cash may be sitting in inventory that moves slowly, or in sales that were delivered but not invoiced and collected on time.
The cash conversion cycle, or CCC, estimates how long cash is tied up in a trading cycle, from paying suppliers to collecting from customers. It gives sales, procurement, inventory and finance a shared view of what delays cash and how much working capital growth may need.
Three time periods to make visible
CCC = DIO + DSO − DPO, measured in days. Match periods and start with average opening and closing balances.
| Driver | Estimate | Management question |
|---|---|---|
| DIO · inventory days | Average inventory ÷ cost of sales × days | Which raw materials, work in progress or finished goods tie up cash? |
| DSO · receivable days | Average trade receivables ÷ credit sales × days | When do we invoice, and when do customers actually pay? |
| DPO · payable days | Average trade payables ÷ credit purchases × days | Do actual payments match agreed terms and expected collections? |
If reliable credit purchase data is unavailable, cost of sales may be used as a DPO proxy with the limitation disclosed. Total sales can distort DSO when cash sales are material. Use actual period days for monthly figures or 365 for annual figures consistently.
Example: profit is booked, but cash remains tied up for 75 days
Turn the metric into management action: five steps
- 01
Gather
Extract credit sales, cost of sales, credit purchases and opening/closing receivables, inventory and payables; add ageing, slow stock and actual due dates.
- 02
Measure
Calculate monthly DIO, DSO, DPO and CCC; segment by business, customer, product and supplier where data supports it. Review seasonality and outliers.
- 03
Diagnose
Compare contracted credit terms with actual payment dates. Identify late invoices, disputes, overdue debts, slow inventory and ordering cycles.
- 04
Act
Assign owners: sales and AR invoice and collect; operations reduce excess stock; procurement agrees workable terms; the CFO tests cost and trade-offs.
- 05
Forecast and review
Update cash receipt dates, purchases, payments and inventory in the forecast. Compare forecast with actual cash weekly and review CCC monthly.
How CCC supports a cash flow forecast
Use DSO to inform collection timing on credit sales, DIO to inform purchases and stock, and DPO to inform supplier payments. Translate these into a dated receipts-and-payments schedule; add payroll, taxes, interest, investment and debt. Then reconcile opening cash + receipts − payments = closing cash and stress-test late collections and faster sales growth.
Read the metric in context
A negative CCC is not a universal target. Extending DPO by paying beyond agreed terms can damage discounts, supplier relationships and supply continuity. Service and project businesses with advances, work in progress and costs outside cost of sales need definitions suited to their model. Compare with the company’s own history and relevant peers, then inspect ageing, data quality and other cash needs.
Measure DIO + DSO − DPO → locate the cause by customer, product and supplier → assign action owners → update the cash forecast → track actual results