An order can look attractive on the income statement and still place pressure on the bank account. Stock, delivery and payment terms determine when the business has to fund the sale.
The cash conversion cycle looks at the time between the cash committed to operating activity and the cash collected from customers. A common calculation is days inventory outstanding, plus days receivable outstanding, minus days payable outstanding.
Make the timing visible
Work with your finance lead to calculate the components consistently. A headline number is a starting point; the movement in each component tells you where to look.
For an illustrative stockholding business, 40 days in inventory plus 45 days to collect payment, less 30 days to pay suppliers, produces a 55-day cycle. That example describes timing, not the amount of funding required. A cash forecast is still needed.
Bring the operating decisions into the discussion
Finance may report the number, but several functions shape it. Sales agrees terms. Operations determines how quickly work is delivered. Procurement chooses when to buy. Billing accuracy influences whether an invoice is paid without dispute.
Ask where a delay originates before treating collection as the only problem. A missing delivery record or unresolved service issue may be holding up payment long before the credit-control conversation begins.
Improve the cycle without damaging the business
Look for changes that make commercial sense: more accurate buying, quicker invoicing, appropriate deposits or better resolution of disputes. Consider the effect on customers, suppliers and service reliability.
Simply paying suppliers late can damage important relationships. Any change to terms should be agreed and assessed against the wider requirements of the business.
Further reading: BDC on cash-flow indicators and the cash conversion cycle.