Cash conversion cycle

The cash conversion cycle is the number of days between the money leaving your account to deliver work and the money arriving from the customer who bought it. For a service business it is roughly: days of work in progress, plus days waiting on the invoice, minus the days your own suppliers let you wait.

It is the reason a profitable business runs out of cash. Profit is measured when the invoice is raised; cash is measured when it clears. A 45-day cycle means that at any moment you are personally financing about a month and a half of everyone else's operations, and every new client makes that hole bigger before it makes it smaller. Growth consumes cash in exactly the businesses that look least likely to need it.

Three levers move it, in order of how quickly they work: invoice on delivery rather than monthly, take a deposit before starting, and negotiate longer terms with your own suppliers. The first is usually free and nobody does it.

Worked: you pay subcontractors and payroll on day 0, finish on day 20, invoice at month-end on day 30, and get paid on 30-day terms on day 60. Your cycle is 60 days. Invoicing on completion instead of month-end removes 10 days; a 40% deposit removes another 24 days of exposure.