Cash Conversion Cycle — Why Profitable Businesses Run Out of Cash

Overview

The cash conversion cycle (CCC) measures how long cash is trapped between paying suppliers and collecting from customers: CCC = DIO (days inventory) + DSO (days receivables) − DPO (days payables). A long CCC means growth consumes cash — the faster you grow, the tighter you get — which is why profitable SMBs go insolvent. Shortening the cycle frees cash without raising a dollar.

The Process

1. Measure the three components — DIO (inventory held), DSO (time to collect), DPO (time you take to pay).
2. Compute CCC and see how many days of cash are locked in operations. Gate: if CCC × daily burn exceeds your cash buffer, growth is a liquidity risk, not just an opportunity.
3. Shorten DSO — invoice immediately, deposits/upfront, faster terms, autopay, chase overdue (pairs with ar-dso-discipline).
4. Shorten DIO — less/just-in-time inventory, drop-ship, faster turns.
5. Lengthen DPO sensibly — negotiate supplier terms without harming the relationship.
6. Model growth against the cycle — project the cash a growth plan will absorb before committing. Gate: scaling with a long CCC and no cash cushion is how solvent firms fail.

When to Use

• "Profitable but always cash-strapped"
• Inventory- or receivables-heavy businesses
• Planning a growth push that will absorb working capital