How to Calculate and Improve Your Cash Conversion Cycle

The invisible number that's costing you money
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You track your revenue. You monitor your expenses. But are you paying attention to your cash conversion cycle (CCC)?

This metric is often overlooked and might be silently limiting your growth potential.

As a business owner, understanding and optimizing your CCC helps you unlock cash that's currently stuck in your operations and putting it to work for your future.

What is the Cash Conversion Cycle?
Simply put, the cash conversion cycle measures how long it takes for your business to convert investments in services into cash from customers.

For service-based businesses, the CCC primarily focuses on how quickly you can:
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Deliver services to clients
Invoice for those services
Collect payment

The longer this cycle, the more working capital you need to keep your business running smoothly. The shorter the cycle, the more resilient your business is to downturns and the more you can invest in growing your business.

Read more - “What is Working Capital? How to Manage Cash in Your Business” →

‍How to calculate your Cash Conversion Cycle

‍For service businesses, the calculation is:

CCC = WIP + DSO - DPO

Where:

WIP (Work in Progress Days): Average days between starting work and invoicing
DSO (Days Sales Outstanding): Average days to collect payment after invoicing
DPO (Days Payable Outstanding): Average days you take to pay your vendors

For example, if you typically:

‍How to calculate your Cash Conversion Cycle

‍For service businesses, the calculation is:

Take 20 days to complete and invoice a project (WIP)
Wait 45 days to receive payment after invoicing (DSO)
Pay your vendors in 15 days (DPO)

Your CCC would be: 20 + 45 - 15 = 50 days

This means you're financing your operations for 50 days before recovering your investment and seeing any profit.

That means, you can shorten your CCC by:

Decreasing WIP: Invoicing sooner, or more often, for example with monthly invoices or milestone invoices instead of at the end of the project, and by sending the first invoice at the start of the project.
Decreasing DSO: Invoicing due upon receipt or Net 15 when you can, sending reminders before an invoice is due to make sure you don’t spend days chasing unpaid invoices, using early payment discounts, and more.
Increasing DPO: Extending payment terms towards your vendors and contractors.

Why your Cash Conversion Cycle matters
Your CCC has direct, practical impacts on your day-to-day business:

Improved liquidity: A shorter cycle means less cash tied up in operations and more available for growth
Reduced financing needs: Less borrowing means lower interest expenses
Greater flexibility: Respond more quickly to opportunities or challenges
Enhanced resilience: Weather downturns with less strain on resources
Faster growth: Reinvest cash more quickly into new business

What's a "good" Cash Conversion Cycle?
For service businesses, these benchmarks provide general guidance:

Negative or Zero: Exceptional (you're paid before you have to pay your costs)
1-30 days: Excellent (minimal cash flow constraints)
30-60 days: Good (manageable with proper planning)
60-90 days: Concerning (likely creating cash flow pressure)
Faster growth: Reinvest cash more quickly into new business

Remember, the ideal CCC varies by business model and industry. What matters most is improving your current cycle, whatever it may be.

5 strategies to improve your Cash Conversion Cycle

‍1. Streamline your Work in Progress (WIP)
For service businesses, these benchmarks provide general guidance:

Break larger projects into billable milestones, or agree to invoice bi-weekly/monthly
Implement project management tools to reduce bottlenecks
Create standardized procedures for common deliverables
Invoice immediately upon completion of work, not at month-end

‍2. Reduce your Days Sales Outstanding (DSO)
Accelerate payment collection:

At negotiation, try for as short payment terms as possible; due upon receipt/Net 15-30.
When sending the invoice, offer early payment incentives (1-3% for payment within 5-10 days)
Make paying easier with multiple payment options
Send invoices with clear payment terms
Use automated payment reminders
Consider requiring deposits or advance payments to work off of

‍3. Optimize your Days Payable Outstanding (DPO)

Strategically manage vendor payments:

Negotiate longer payment terms with vendors where possible
Take full advantage of payment terms (without damaging vendor relationships)
Schedule payments strategically around your cash flow
Look for vendor early payment discounts that exceed your cost of capital

‍4. Improve your forecasting

Better prediction leads to better cash management:

Track historical patterns in client payments
Identify seasonal fluctuations in your CCC
Anticipate cash flow bottlenecks before they occur
Build buffer periods into your financial planning

‍5. Leverage technology

Automate to accelerate your CCC:

Use electronic invoicing for faster delivery
Implement online payment systems for quicker processing or use an invoicing tool that lets you offer multiple payment methods when invoicing
Schedule reminders before payment is due to ensure it’s on its way
Automate follow-ups and reminders for outstanding invoices
Track CCC metrics in real-time dashboards

‍Industry-specific considerations for service businesses

Automate to accelerate your CCC:

Little to no inventory but significant time between service delivery and invoicing
Time-based billing that often accumulates before invoicing
Project-based work with varying cash flow patterns
Varying client payment behaviors affecting predictability
Staff costs paid weekly/bi-weekly while clients pay monthly/quarterly

These factors make it essential to actively manage your cycle rather than letting it happen.
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Measuring success: CCC benchmarks

While optimal CCCs vary by industry, aim to:‍

Reduce your CCC by at least 10-15% in the first year of focused effort
Compare your CCC to industry averages (often available through industry associations)
Track trends in your own CCC over time rather than focusing only on absolute numbers - sometimes growing your business means taking on larger clients that will naturally have longer payment terms, which is good for business but not so good for CCC

Remember, even small improvements compound over time and can significantly impact your business's financial health.These factors make it essential to actively manage your cycle rather than letting it happen.
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How Cheque helps optimize your Cash Conversion Cycle

Cheque was designed specifically to help businesses shorten their cash conversion cycle:

Accelerate DSO with flexible payment terms and early payment incentives
Streamline the invoicing process to reduce delays
Provide visibility into payment patterns for better forecasting
Automate payment follow-ups to reduce collection time

Unlike financing solutions that simply cover cash flow gaps (at a cost), Cheque helps you fix the underlying cycle that creates those gaps in the first place.

You can influence your cash conversion cycle with the right strategies and tools. By understanding and actively managing your CCC, you can free up cash for growth, reduce stress, and build a more financially resilient business.

Ready to see how much cash you could unlock by optimizing your cash conversion cycle? Let's talk about how Cheque can help.

Schedule your demo today →