What is the cash conversion cycle?

The cash conversion cycle (CCC) – also known as the cash cycle – is a metric that measures the time it takes for your business to convert investments in inventory and other resources into cash from sales.

It’s calculated with a simple formula, which takes into account the time to:

• Produce, hold and sell goods (Days Inventory)

• Collect payment from customers (Days Receivables)

• Pay suppliers (Days Payables)

Cash Conversion Cycle = Days Inventory + Days Receivables - Days Payables

Ideally, the number that this formula produces will be low, or even negative (more on this in a minute). 

There are three ways can reduce your CCC:

• Sell your inventory faster (Days Inventory)

• Collect payment earlier (Days Receivables)

• Pay suppliers later (Days Payables)

The 9th wonder of the world: negative CCC

Albert Einstein once said, “Compound Interest is the eighth wonder of the world. He who understands it earns it, and he who doesn't pays it.”

In business, a negative cash conversion cycle is considered to be the ninth wonder of the world as it enables companies to grow without the need for external capital.

Let’s look at a real-life example…

In 2012, 19-year-old Ben Francis, launched GymShark, a sports clothing brand from his mum’s garage. He delivered pizza by day and made clothes by night using a screen printer and sewing machine. Fast forward 10 years, Gymshark is now worth £1.25 billion, having scaled revenue from £9 million in 2015 to £440 million in 2022.

What was the secret ingredient that helped the company achieve this growth with minimal external funding? Its negative cash conversion cycle.

In fact, Gymshark’s suppliers were financing its growth. On average, Gymshark was able to use:

• 108 days to sell an item in its inventory

• 19 days to collect money from its customers

• 163 days to pay back its suppliers

Cash Conversion Cycle = Days Inventory + Days Receivables - Days Payables

108+19-163 = -36

Gymshark’s CCC was -36!

This means they had cash on hand for 36 days for every item they sold, which they could use to finance their growth. CCC is THE financial metric that drove their capital-efficient success.

How to control CCC with your Payment Terms

Payment terms (and whether you and your customers adhere to them) are what determine the conversion times of your receivables and payables. They are therefore key to your control over the CCC.

Here are some things you can do on both ends to improve your payment terms:

Tips for optimising your receivables:

1. Offer early payment discounts to incentivise customers to pay invoices sooner.

2. Make sure payment terms are clearly communicated on invoices or through a separate agreement.

3. Set up automated payment reminders to avoid having to chase payments.

4. Negotiate custom payment terms that better align with your cash flow needs.

Tips for optimising your payables:

1. Negotiate longer payment terms with suppliers to help conserve cash.

2. Make use of early payment discounts offered by suppliers for prompt payment.

3. Utilise purchase order financing or supplier credit lines to ensure you have the necessary funds to pay suppliers on time.

4. Consider consolidating suppliers to negotiate better payment terms.

Achieve negative CCC with Mimo

While negotiating payment terms is a key method in unlocking negative CCC, most of our customers find that, as relatively small businesses, negotiating terms can be very challenging.

Helping you overcome this, Mimo allows you to delay supplier payments without interfering with supplier relationships. This helps you increase your Days Payable, and ultimately achieve a lower, or even a negative CCC.

Want to know more? Reach out to discover how Mimo can help your business grow and thrive.