Improve the cash conversion cycle

Who this is for

Founder led lower-middle market companies with 5 to 50 million in annual revenue that want more cash from the same revenue.

The quick answer

Work each lever. Faster billing and collections to lower days sales outstanding. Tighter inventory planning and turns to lower days inventory on hand. Better supplier terms to extend days payable. Use deposits, progress billing, and standard lead times. Track the cycle each month and tie projects to the biggest gains.

The method in eight steps

Measure the baseline
Calculate days sales outstanding, days inventory on hand, and days payable. Show the combined cycle for the last four quarters.
Fix billing speed
Invoice on shipment or milestone, not month end. Automate invoice delivery and add purchase order checks at order entry.
Tighten collections
Call first on large and late items. Offer card or electronic options. Use a small early pay credit when it reduces cost.
Plan inventory by class
Set class based targets and replenishment rules for A B and C items. Review stockouts and excess together.
Standardise lead times
Publish realistic lead times and enforce them in sales so promises do not create rushes and rework.
Improve payables discipline
Align supplier terms to your cash cycle and volume. Use a scorecard and share your demand plan in quarterly reviews.
Use deposits and progress billing
For custom work take deposits. For long projects bill by milestone with clear acceptance rules.
Track and prioritise
Review the cycle monthly. Fund the projects that move the largest lever this quarter.

Example

A distributor added milestone billing and class based inventory rules. Days sales outstanding fell by seven days and turns improved. The cycle shortened by thirteen days within two quarters.

Pitfalls and fixes

Billing after delivery. Invoice on shipment or milestone.
Inventory targets that are the same for all items. Use classes.
Negotiating supplier terms without volume plans. Share plans and scorecards.

Checklist

Baseline for DSO DIO and DPO
Billing on shipment or milestone
Collections playbook and payment options
Class based inventory targets
Supplier scorecards and review dates