A cash conversion cycle counts the days between paying a supplier and collecting from a sale. A monthly forecast shows which month runs short and by how much. Both cases below are invented, and every figure in them is computed from the inputs shown.
Where a Hopkinsville, KY pet supply store's cash sits: an invented cash conversion cycle
Illustration only, invented figures: a Hopkinsville, KY pet supply store sells $560,000 a year at a cost of goods of $384,000. In this invented case it carries $71,400 of stock on average, waits on $3,100 of card settlements and owes suppliers $26,300 at any given time.
| Measure | How it is worked | Days |
|---|---|---|
| Days of stock on hand | average stock $71,400 / yearly cost of goods $384,000 x 365 | 67.9 |
| Days waiting on card settlements | average card receivables $3,100 / yearly sales $560,000 x 365 | 2.0 |
| Days of supplier credit | average supplier balance $26,300 / yearly cost of goods $384,000 x 365 | 25.0 |
| Cash conversion cycle | stock days + settlement days - supplier days | 44.9 |
In this invented example, each dollar spent on stock takes about 44.9 days to come back as cash. The store has to carry that stretch from its own balance or from outside money, which is how cash flow problems show up in a business with healthy sales.
Shortening the cycle: two changes worked for the same invented store
- Trim slow stock by $12,000: in this invented case the average stock falls to $59,400, stock days drop from 67.9 to 56.5, and the $12,000 comes back as cash once the slow lines are sold through.
- Ask suppliers for 40-day terms: in this invented case the average supplier balance rises to $42,082.19, which leaves $15,782.19 more cash in the store at any given time.
- Both together: in this invented example the cycle falls from 44.9 days to 18.5 days.
If the cycle still runs longer than the balance can carry, a line of credit drawn for the gap is one option, and inventory financing against the stock itself is another.
Six months on one sheet: a monthly cash forecast for a Christian County, KY wholesaler's supplier payments
Illustration only, invented figures: a Christian County, KY wholesaler opens the period with $38,500. In month 3 it pays $68,900 to suppliers in this invented case, much of it stock for one large contract order, and the contract customer pays in month 5. An invented payroll of $17,600 a month and a quarterly insurance premium sit in the same sheet.
| Month | Customer receipts | Supplier payments | Payroll | Other costs | Closing balance |
|---|---|---|---|---|---|
| Month 1 | $61,200 | $39,800 | $17,600 | $6,900 | $35,400 |
| Month 2 | $58,400 | $41,200 | $17,600 | $6,900 | $28,100 |
| Month 3 | $54,900 | $68,900 | $17,600 | $9,450 | -$12,950 |
| Month 4 | $63,700 | $40,600 | $17,600 | $6,900 | -$14,350 |
| Month 5 | $96,800 | $42,100 | $17,600 | $6,900 | $15,850 |
| Month 6 | $66,100 | $39,500 | $17,600 | $9,450 | $15,400 |
In this invented forecast, month 3 closes $12,950 short and month 4 closes $14,350 short. Against a $15,000 cushion, a $30,000 line of credit draw at the start of month 3, repaid 61 days later from the month-5 contract payment, costs $629.22 of interest at a 12.55% annual rate in this invented example, and month 5 still closes at $15,220.78.
Article topics for Christian County, KY owners: contract payroll, a service truck, a new provider, kitchens, equipment sources and a second franchise unit
- Payroll Gaps and Supplier Bills in Hopkinsville, KY: payroll for a new cleaning contract, a supplier discount and a credit line.
- A Service Truck and Tools for Hopkinsville, KY Repair Shops: a repair shop’s service truck and shop tools, on one loan or two.
- New Provider, Third Exam Room: Hopkinsville, KY Clinics: a third exam room’s equipment and a new provider’s pay before collections catch up.
- Who Funds a Hopkinsville, KY Kitchen?: banks, equipment lenders and card-sales advances for a restaurant.
- Equipment Finance Sources for Hopkinsville, KY Landscapers: a landscaper’s dealer offer against a cash discount, and a used loader.
- Financing a Second Franchise Unit in Hopkinsville, KY: the fee, equipment and training payroll for a second franchise unit.
By Rowanharbor Finance · Updated