Cash conversion cycle: from days to a funding schedule

Calculate the cash conversion cycle as inventory days + receivable days − payable days, using a compatible period and the correct denominator for each balance. Then build a dated cash schedule for large purchases. Cycle days describe timing; they do not by themselves tell you how much funding a growing inventory business needs.

Rebuild the three ratios

Use average balances where they represent the trading pattern. A year-end balance can be misleading if the business buys heavily just before year-end or sells seasonally. Keep credit sales separate from cash sales and supplier payables separate from unrelated liabilities.

The cycle is 50 + 20 − 30 = 40 days. ACCA's ratio definitions use cost of sales for inventory, credit sales for receivables, and credit purchases or a disclosed cost-of-sales approximation for payables. The three balances do not share one economic denominator.

For example, multiplying 40 days by $2,000 daily credit sales gives $80,000. Yet the included average inventory plus receivables less payables is $50,000 + $40,000 − $30,000 = $60,000. The $20,000 difference comes from applying a sales denominator to balances partly measured at cost. Neither number is automatically the next month's peak funding need.

Find which part of the cycle is changing

If inventory rises to 65 days while the other ratios remain unchanged, the cycle becomes 55 days. At the assumed $1,000 daily cost of goods sold, 15 additional inventory days correspond to $15,000 more average inventory at that activity level. That is a balance estimate, not proof that a $15,000 supplier payment is due immediately.

Investigate the actual cause: slower selling stock, earlier replenishment, a minimum order, a seasonal build or damaged goods that cannot be sold. Longer supplier terms may reduce the ratio, but only use terms available to the business. ACCA's working-capital discussion explains why payment timing also has supplier-relationship and discount consequences.

Schedule the cash for a real purchase pattern

Consider a separate, simplified batch example. Each batch contains 100 units costing $12 each and eventually collects $20 per unit. The supplier requires a 30% deposit, with the 70% balance paid on delivery twenty days later. Customers pay after sale. Batch one is ordered on day 0 and collected on day 55; batch two is ordered on day 10 and collected on day 65. Ignore other costs and taxes for this example.

One batch earns $800 before the excluded costs, but two overlapping batches require $2,400 before either customer payment arrives. With $1,000 opening cash, the lowest bank balance before new funding is −$1,400. To keep an assumed $200 reserve, additional funding is $1,600, available by the relevant payment dates.

In Excel, calculate the cumulative total of dated movements and add opening cash. For a constant reserve, =MAX(0,Reserve-MIN(CashBeforeNewFunding)) gives the additional upfront requirement when those names refer to your reserve cell and cash range. Do not use the batch's margin as a substitute for its funding schedule.

Separate a longer wait from a larger purchase

If the first $2,000 collection moves from day 55 to day 70 and no other payments change, the existing $2,400 peak outflow lasts longer but does not grow in this bounded two-batch example. If a third batch must be paid before collections arrive, the amount can increase as well. Model the actual sequence instead of automatically multiplying a delay by average sales.

Use the supplier lead-time guide for the reorder decision, the contribution guide for order economics, and the weekly cash forecast to combine inventory with payroll and the rest of the business. Good margins, short average cycle days and enough cash on a particular payment date are separate questions.