Cash to Cash Cycle - Cash Days Ratio
Cash is the life blood of any business, so it is important to get into the habit of controlling your cash cycle as soon as possible.
The basic rules are: get paid by your customers as quickly as possible, and delay payment to suppliers & workers for as long as possible.
This ratio is the combination of three main Working Capital Ratios (widely accepted recognised metrics across all industry sectors):
- Inventory or Stock days – how long it takes for your stock to be turned into cash.
- Accounts payable (Creditor) days – how long it takes for you to pay your suppliers.
- Accounts receivable (Debtor) days – how long it takes for your customers to pay.
The idea is the quicker you can turn that cash around, the Cash Days Ratio tells you how many days that takes, the lower the number, the quicker is your cash out to cash in cycle.
Cash Days Ratio - The Formula
Cash Days are a combination of the three metrics listed above combined into one number, to give you a snapshot of how long it takes for the money to go through your business. How is it calculated?
Cash days = Stock days plus WIP days, plus Debtor days minus Creditor days.
It is important know how quickly you get paid, and how quickly you pay, it really helps you understand how to manage your cash flow & these metrics tell you that.
The general idea is to keep stock, work in progress (WIP) & debtor days to a minimum & creditor day as high as possible. Make sure your stock is used quickly & kept at low but optimal levels, pay those who supply you as late as possible, & you get paid quickly for the work you do. By doing this you keep the cash in your business as long as possible & replenish it quickly.
Most suppliers will be happy to offer 30 days or payment at the end of the following month, some when pushed offer 60 days or perhaps even 90 – clearly better than paying for what you buy immediately over the counter. This can depend on having a good credit rating.
With customers good strategies are to ask for stage payments before or as you start work, state your terms of payment on presentation or before you invoice.
We can help you by giving you the info or calculating your Cash Days, then by monitoring them & telling you if they look out of step.
Cash to Cash Conversion Cycle – Questions to ask yourself regularly to keep your cash on track:
- Are sales invoices being raised immediately?
- Are customers paying on or by their due date?
- Can you get your customers to pay you in advance or in stage payments?
- Can you agree deposits?
- Can you offer discounts to get paid quicker?
- Can you use direct debits & standing orders to collect?
- Could you develop a subscription service for your business, like Amazon did with Prime?
- Can you agree longer terms with your suppliers?
- Are suppliers being paid on the last possible day?
- Can you speed up the production system or outsource it?
Conclusion
Mastering your Cash Days Ratio is essential for maintaining a healthy cash flow and ensuring your business remains financially resilient. By consistently monitoring and optimizing the cash-to-cash cycle, you can improve liquidity, reduce reliance on external financing, and create a more predictable financial future.
The key takeaway is simple: Get paid as quickly as possible, delay payments where feasible, and optimize your stock turnover. Regularly assessing your cash cycle and asking the right questions can help you identify areas for improvement and keep your business in a strong cash position.
If you need support in calculating, monitoring, or improving your Cash Days Ratio, we’re here to help. With the right insights and strategies, you can ensure your cash is working for you—not against you.
If this resonates with you or you find it interesting, why not book a meeting to see what else we can do to help you?
