Cash cycle
The number of days between the moment the company pays and the moment it is paid: client payment delay, plus the time work in progress or stock ties up cash, minus the credit obtained from suppliers, all expressed in days of revenue.
What it changes for the executive
It is the reading executives most often confuse with profitability, although a profitable company goes bankrupt by this road and no other. The more the company grows, the tighter its cash becomes, even as profit improves: every franc of growth ties up, for the length of the cycle, what had to be spent to produce it. The useful benchmark is not a number but a trend; a cycle lengthening by more than ten days from one year to the next signals a deterioration before the accounts show it.
Example
An engineering firm that bills on progress and waits seventy-eight days to be paid, with twenty-three days of work in progress and six days of supplier credit, lives with a ninety-five-day cycle: nearly a quarter of its annual revenue is permanently financed by its cash or its bank.
A term that is missing?
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