ValuationIntermediate· 7 min read

The cash conversion cycle: how long your money is trapped

The one thing to remember

A business with a negative cycle is funded by its customers. Growth generates cash instead of consuming it, which changes everything.

The question

Spot the businesses whose growth pays for itself.

Figure

How the cash conversion cycle: how long your money is trapped works, in one picture

The same argument as the text, as a chain. Each step is what makes the next one possible.

Figure

How the three statements lock together

Profit flows from the income statement into the balance sheet as retained earnings, and the cash flow statement reconciles what was earned with what actually arrived.

1
Three numbers, in days
How long stock sits before it sells. How long customers take to pay. How long you take to pay suppliers. Add the first two, subtract the third, and you have the number of days your cash is trapped inside the machine.
2
Positive means growth eats cash
A growing company with a long cycle must buy stock and wait to be paid, which consumes cash faster the faster it grows. This is exactly how profitable companies go bust, and it surprises people every single time.
3
Negative means growth prints cash
Supermarkets sell food before paying the farmer. Subscription businesses collect a year up front. These companies are financed, interest free, by their own customers, and every new customer hands them working capital rather than taking it.
This is one of the most underrated advantages in business, and it never shows up in a P/E.
4
And a lengthening cycle is an early warning
If customers start paying more slowly, or stock starts sitting longer, the cycle stretches. That happens before it reaches the income statement, which makes it one of the earliest honest signals you can get.

Try it

Compound interest simulatorInteractive

Compounding Without compounding

Starting amount1000 £

Added each month200 £

Annual return7%

Years30

You put in

£73,000

Growth

£179,111

Final

£252,111

Drag the years slider. Notice the curve barely lifts for a decade, then goes near vertical. That is why starting early matters more than the rate.

You have got it when

You can compute the cycle for a company and say whether growth funds itself.

The cash conversion cycle: how long your money is trapped

How the cash conversion cycle: how long your money is trapped works, in one picture

How the three statements lock together

Three numbers, in days

Positive means growth eats cash

Negative means growth prints cash

And a lengthening cycle is an early warning

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