How long is your cash actually tied up?

A profitable business can still run out of money, and growth makes it worse rather than better. One calculation tells you how many days your cash spends away from you — and how much you need to fund a good year.

·4 min read

Every figure below is hypothetical. The pattern is not.

There is a specific kind of misery that belongs to trading businesses: the accounts say you made money, the bank says you have none, and the two facts sit there refusing to reconcile.

Nothing is wrong with either. Profit and cash are different things, separated by time, and there is one number that measures the gap.

The cycle

Follow a single naira through your business.

You pay a supplier. The stock sits in your warehouse. You sell it. Then you wait to be paid. Only at that last moment does the naira come back to you — and it cannot be used for anything until it does.

Three stretches, one of which works in your favour:

Days inventory. How long stock sits before it sells.

Days receivables. How long customers take to pay after you deliver. This is your DSO, from receivables aging, done properly.

Days payables. How long you take to pay your suppliers. This one is a subtraction, because while you owe them, they are funding your stock rather than you.

cash conversion cycle = days inventory + days receivables - days payables

Say stock turns in 30 days, customers pay in 45, and your supplier gives you 15:

30 + 45 - 15 = 60 days

Your cash spends sixty days away from you. Every naira you put into stock is unavailable for two months.

What that costs, in naira

The days become money when you multiply by how fast you trade.

At a cost of goods of ₦20,000,000 a month:

daily cost of goods = 20,000,000 / 30 = 666,667
working capital needed = 666,667 x 60 days = 40,000,000

You need ₦40 million permanently in the business just to operate at this size. Not for expansion, not for a rainy day — that is the float required to keep the current volume moving. It is why a business can be genuinely profitable and genuinely broke at the same time, and why the owner's answer to "where is the money?" is always in stock and in customers' hands, which is correct and unhelpful.

Why growth makes it worse

This is the part that catches people, and it catches good businesses hardest.

Double your sales and the cycle does not shorten. You need twice the stock, and you wait on twice the receivables. Working capital required goes from ₦40 million to ₦80 million.

So a business that wins a large new customer, celebrates, and starts buying to serve them discovers three months later that it is short of cash because it grew. The profit is real. It is just parked in stock and receivables, and it will not be liquid for sixty days.

Growth funded from cash flow is limited by your cycle, not by demand. A business with a 20-day cycle can grow three times faster than an identical one at 60 days, on the same money.

Shortening it

Each of the three legs is a separate lever, and they are not equally easy.

Days inventory — usually the easiest. Most SMEs hold more stock than they need because a stockout is embarrassing and cash sitting in a warehouse is invisible. Find your slow lines. A product that turns twice a year is not inventory, it is a decision you made once and have been financing ever since.

Days receivables — the biggest lever, and the hardest. Every day you shave here is a day of free financing recovered. Tighter terms, earlier chasing, a discount for early settlement. Note that a 2% discount for paying 30 days early is roughly 24% annualised — expensive, and still cheaper than borrowing at 30%.

Days payables — the one people forget. You are entitled to ask for terms in the same breath your customers ask you. Suppliers who want the volume will often give 14 or 30 days simply because nobody asked. Every day here is a day of somebody else's money funding your stock, at no cost.

What to actually do with this

Calculate it once, today, from figures you already have. Then calculate it every quarter and watch the direction.

The reason to know the number is not the number. It is that it converts vague statements into arithmetic:

Most businesses that fail are profitable on the day they fail. They run out of the cash to keep going, which is a different problem with a different solution, and this is the number that tells you which one you have.