Cash conversion cycle: How to improve your business liquidity

This cash conversion cycle tracks the time between paying suppliers for raw materials and receiving customer payments. The CCC helps you understand how efficiently your business manages cash flow. A shorter CCC means you recover cash faster, reducing financial strain and improving liquidity.

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Managing CCC well ensures you have enough cash to cover expenses, invest in growth, and reduce the need for loans. Businesses that optimize CCC can operate with less cash tied up in operations than competitors.

Three key components of CCC

The different components of CCC help you see where your cash gets stuck and how to free it up. If your inventory sits too long, payments take too long to arrive, or supplier bills are paid too quickly, your business could face cash shortages. Optimizing these areas can reduce financial stress, improve liquidity, and create a more efficient operation.

1. Days inventory outstanding (DIO)

DIO shows how long you hold inventory before selling it. A high DIO means products sit in storage longer, tying up cash and increasing COGS. A low DIO means you sell inventory quickly, keeping cash flow strong. Retail and fast-moving consumer goods (FMCG) businesses usually have a lower DIO because they sell products faster. Manufacturers and wholesalers often have a higher DIO due to longer production cycles and bulk purchases.

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The average DIO across industries ranges from 30 to 60 days. Leading businesses aim for under 30 days to keep inventory moving efficiently. You can lower DIO by forecasting demand, improving stock management, and avoiding unnecessary overstocking.

2. Days sales outstanding (DSO)

DSO tracks how long it takes to collect customer payments after making a sale. A high DSO means customers take longer to pay, which can create cash shortages. A low DSO means you collect payments faster, improving cash flow management.

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B2C companies tend to have lower DSO because they receive immediate payments. B2B businesses often deal with longer collection processes and operating cycles due to extended payment terms. The average DSO across industries is usually 45 days, but top companies keep it under 30 days. You can lower DSO by offering early payment discounts, tightening credit policies, and automating invoicing.

3. Days payable outstanding (DPO)

DPO measures how many days you take to pay suppliers. A high DPO lets you hold onto cash longer, improving liquidity. However, delaying payments too much can hurt supplier relationships. A low DPO means you pay quickly, but this can reduce cash available for other expenses.

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Businesses with strong supplier relationships often negotiate longer DPO to keep cash flow steady. The average DPO across industries is 55 days, but businesses with strong financial health extend it to 65 days or more. To optimize DPO, you can negotiate better payment terms, use supplier discounts, and balance cash flow while keeping good vendor relationships.

How to calculate the cash conversion cycle

The cash conversion formula tracks the time between paying suppliers, selling inventory, and collecting customer payments. You can calculate your company’s CCC using this formula:

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CCC = DIO + DSO − DPO

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Adding DIO and DSO gives the total time cash is tied up in operations. Subtracting DPO accounts for delayed outgoing payments, helping offset cash flow pressure.

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Suppose your small business has a DIO of 40 days. This means your average inventory stays in stock for 40 days before being sold. Your DSO is 35 days, so customers take 35 days to pay after making a purchase. Your DPO is 30 days, meaning you take 30 days to pay suppliers.

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Now, applying the formula:

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CCC = 40 + 35 − 30

CCC = 45 days

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This means your business's cash remains tied up for 45 days from the time you buy inventory until you collect payment.

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Why a shorter cash conversion cycle matters for business growth

A shorter cash conversion cycle (CCC) helps your business move cash faster. You collect payments quickly, turn over inventory efficiently, and manage payables wisely. It improves cash flow and reduces the need for loans or credit. With a strong CCC, you can reinvest in growth without waiting for cash to free up.

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A long CCC ties up money, making it harder to cover expenses or fund new opportunities. This is why around 82% of business failures happen due to poor cash management. A short CCC gives you more financial flexibility, so you can expand, hire staff, and invest in better operations without cash shortages.

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A shorter CCC also boosts profitability. Faster cash cycles mean you borrow less, lowering interest costs. They also let you take advantage of early payment discounts from suppliers, improving your profit margins.

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A well-optimized CCC gives you a competitive edge. Businesses that collect payments faster can react to market changes, invest in innovation, and scale quickly. This is especially important in fast-moving industries like retail and e-commerce. To shorten your CCC, you should focus on turning inventory faster, speeding up receivables, and managing payables smartly.

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Strategies to improve your cash conversion cycle

Improving your company’s cash conversion cycle (CCC) can lead to noticeable results in a short time. Some strategies, like automating invoicing or sending payment reminders, can speed up cash flow within weeks. Others, like renegotiating supplier terms or refining inventory management, may take a few months to show full impact.

Reducing inventory holding time without stockouts

Holding too much inventory ties up cash and increases storage costs. On the other hand, running out of stock can lead to lost sales. The goal is to keep enough inventory to meet demand without overstocking.

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To achieve this, analyze past sales data and track demand patterns. Inventory forecasting tools, help predict how much stock you need. A just-in-time (JIT) inventory system can reduce holding costs by ensuring stock arrives only when needed. Regular inventory checks also help identify slow-moving products so you can adjust your orders.

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When you manage inventory effectively, you reduce days of inventory outstanding (DIO) and free up cash on your balance sheet. You also lower storage costs and minimize losses from unsold products.

Accelerating accounts receivable without alienating customers

When customers take too long to pay, cash remains tied up. To improve day sales outstanding (DSO), you must speed up collections without harming customer relationships.

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Start by sending invoices immediately after sales. Make payment terms clear, including due dates and late fees. Offering early payment discounts can encourage customers to pay faster. For example, a 2% discount for payments made within 10 days gives customers an incentive. Automated reminders also help ensure customers pay on time.

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With these changes, you will collect payments faster and have fewer outstanding invoices. Your cash flow will improve, reducing the need for short-term credit to cover expenses.

Negotiating better payment terms with suppliers

Extending supplier payment terms helps improve days payable outstanding (DPO) by keeping cash in your business longer. However, delaying payments too much can harm supplier relationships. The key is to negotiate better terms without losing supplier trust.

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Review your current payment terms and approach suppliers requesting an extension. If you have a good payment history, they may agree to 45- or 60-day terms instead of 30 days. Some suppliers also offer better terms if you increase order volumes.

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By securing longer payment periods, you keep more cash in your business. This reduces financial pressure while maintaining good relationships with suppliers.

Leveraging automation and technology for faster CCC optimization

Manual processes slow down your CCC. Tasks like invoicing, payment processing, and inventory tracking take time and increase errors. Automation speeds up these processes, reduces mistakes, and improves operational efficiency.

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Cloud-based accounting platforms like QuickBooks, Xero, or NetSuite let you track receivables and payables in real time. You can also automatically sync your transactions, receipts, and reimbursements using accounting automation. That reduces reconciliation time, ensuring your financial records stay clean with minimal effort.

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With automation, your business will experience faster payment cycles, better inventory control, and improved cash flow visibility.

Tools and financial solutions to manage CCC effectively

Financial tools help you better track your inventory, speed up receivables, and optimize payables. This improves cash flow and reduces financial risk.

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Corporate cards help you manage CCC by extending payment cycles, simplifying expense tracking, and improving cash flow visibility. Using a corporate card allows you to delay cash payments while keeping business operations smooth.

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Paying with a corporate card extends days payable outstanding (DPO) without straining supplier relationships. Instead of making immediate cash payments, you can use the card's billing cycle. Depending on your card's terms, this lets you defer expenses by 30 to 60 days. Holding onto cash longer helps you cover expenses and reinvest in growth before making payments.

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With Ramp's Corporate Cards, you can also streamline your expense management and improve your cash flow. This flexibility allows for precise expense management, ensuring that spending aligns with company policies and budgets. Additionally, Ramp's platform automates expense reporting by matching receipts to transactions in real time, reducing manual administrative tasks and providing immediate insights into spending patterns.

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Corporate cards also eliminate slow and inefficient reimbursement processes. Employees no longer need to pay out-of-pocket and wait for refunds. Instead, they can use the card for business expenses, which reduces delays and simplifies expense tracking.

Strengthen your cash flow with a streamlined cash conversion cycle

A streamlined cash conversion cycle (CCC) helps your business stay financially strong. When cash moves faster, you can cover expenses, invest in growth, and rely less on credit. Businesses that optimize CCC need less working capital and see higher profits.

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Better cash flow removes financial roadblocks. As an employer, you can reinvest in expansion, hire skilled employees, and upgrade technology without cash shortages. A healthy CCC also reduces the need for short-term loans, lowering interest costs and improving profit margins.

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You create a cash-positive business by reducing inventory holding time, collecting payments faster, and managing payables wisely. Using financial tools like Ramp can further optimize your CCC. Ramp’s corporate cards help extend payment cycles, giving you more flexibility to manage expenses while keeping cash on hand.