Understand where working capital gets stuck

Understand the three parts

Inventory days estimate how long inventory remains before sale. Receivable days estimate how long credit sales take to collect. Payable days estimate how long the business takes to pay suppliers.

BDC’s cash-conversion-cycle guide explains the operating cash journey.

Calculate inventory days as average inventory ÷ cost of sales × days in the period. Calculate receivable days as average trade receivables ÷ credit sales × days in the period. Calculate payable days as average trade payables ÷ credit purchases × days in the period.

Some analyses use cost of sales as a proxy for purchases; state that choice because it changes interpretation.

Use consistent treatment of taxes, returns and balances. Ask your finance professional to help align the measures with your accounts. A precise-looking ratio built from mismatched figures can mislead.

An illustrative manufacturer’s cycle

Suppose a manufacturer estimates 45 inventory days, 30 receivable days and 25 payable days. The cash conversion cycle is 45 + 30 − 25 = 50 days. This is an illustrative calculation, not an industry target.

Suppose better invoice completeness reduces receivable days to 24, with other components unchanged. The estimated cycle becomes 44 days. That improvement does not directly tell you how much profit increased or whether the month’s cash balance will be positive.

Find the cause inside each average

For inventory, separate slow-moving finished goods from essential components with long supplier lead times. Cutting both equally may cause shortages. For receivables, inspect missing approval documents, disputes and genuine credit risk.

For payables, distinguish negotiated terms from overdue bills.

The RBC working-capital guide presents the CCC relationship as DSO + DIO − DPO. Treat that as a diagnostic relationship, not permission to delay every supplier payment. Damaging a critical supplier can create a much larger operating problem.

Seasonality matters. A business building stock before a busy season can show a longer cycle for a valid reason. Compare similar periods and keep the sales forecast visible.

Turn the measure into a focused action

Choose one component and a specific cause. For example, ensure a buyer’s purchase-order reference is recorded before delivery so invoices do not wait for correction. Assign an owner and measure actual progress.

1. Choose a representative period and consistent accounting definitions.
2. Calculate average inventory, trade receivables and trade payables.
3. Use matching cost, credit-sales and purchase figures.
4. Inspect the oldest balances and record why they remain open.
5. Change one repeatable cause and compare similar periods.
6. Keep a separate weekly forecast of dated cash receipts and payments.

Keep operational evidence separate from settlement

A customer’s promise to pay belongs in expected receipts. It should not reduce the receivable until the relevant payment or adjustment is verified. The same applies to a screenshot suggesting a transfer.

Keep expected receipts, disputed amounts and confirmed transactions clearly separated. Assign an owner to missing documents and overdue checks, and use the accounting records to reconcile the totals. If an expected receipt moves, update the cash plan and identify the decisions affected.

A clear explanation of timing is more useful than a ratio with no underlying action.

A useful working-capital review ends with a few named actions, not only a lower target ratio. Ask what will change in purchasing, delivery paperwork or collections this week.