Your revenue is growing year-over-year, but your bank account doesn’t reflect it. You are running out of cash despite hitting your sales targets.
The Solution: Managing your Cash Conversion Cycle (CCC) rather than just tracking net income.
Many businesses fall into the “growth trap.” They assume that higher sales automatically equal a healthier business. However, expanding operations requires upfront cash for inventory, payroll, and overhead. If your clients take 60 days to pay you (Days Sales Outstanding), but your suppliers demand payment in 30 days (Days Payable Outstanding), you are essentially financing your clients’ businesses out of your own pocket.
To solve this, calculate your CCC monthly using this formula:
Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Your goal is to get this number as close to zero (or negative) as possible. Renegotiate terms with vendors, incentivize early client payments with net-15 discounts, and aggressively manage inventory turn times to stop leaking cash during growth phases.
To see how your company DSO compares to others, one hack is to use information available from your personal portfolio management company. These companies usually offer at no additional charge competitive information by industry. Once your DSO is known relative to your industry, take steps to improve which will improve your cash flow.
