How long is my money stuck between buying stock and getting paid?
The cash conversion cycle counts the days your money is tied up, and shortening it is often the cheapest way to free up cash.
You pay your supplier, the stock arrives, it sits for a while, you sell it, and eventually the money reaches your bank. During that whole stretch your cash is somewhere else. The number of days it is away from you is your cash conversion cycle.
The three parts
You need three counts of days.
- Days you hold stock before it sells.
- Days you wait after a sale to receive the money. For a seller with cash on delivery, this is the wait for the courier payout.
- Days of credit your supplier gives you before you must pay them.
The formula is: days holding stock plus days waiting for payment minus days of supplier credit.
A worked example
Say your stock sits for about 30 days before it sells. After a COD order is delivered, the payout reaches you in 7 days. Your supplier lets you pay 10 days after delivery.
30 plus 7 minus 10 is 27 days. For about four weeks, money you spent on stock is not available to you.
These are illustrative figures. Measure your own: look at when stock arrived against when it sold, check your payout dates, and read your supplier terms.
What that means in rupees
Suppose you buy Rs 1,000 worth of stock for every day of sales. Over a 27 day cycle, around Rs 27,000 is out working for you at any time, and not in your hand. Your real cash need is the daily spend times the cycle length.
Cutting stock days from 30 to 20
Imagine you tighten your buying and order smaller batches more often, so stock sits only 20 days. The new cycle is 20 plus 7 minus 10, which is 17 days. Ten days shorter.
At Rs 1,000 a day, the money stuck falls from Rs 27,000 to Rs 17,000. You have freed Rs 10,000 without selling an extra item. That is real cash for ads, restocking or a cushion.
Levers you can pull
- Stock days. Buy in smaller lots for your fast sellers, and stop reordering items that move slowly. The post on a smaller catalogue argues for this.
- Payout wait. More prepaid orders reach your account faster than cash on delivery. A gentle nudge towards UPI at checkout can shorten the wait. See UPI and COD payments for your own store.
- Supplier credit. Ask for 15 days instead of 10. Many suppliers say yes to a customer who pays on time, every time.
Be careful with the last one. Stretching supplier payments beyond what was agreed damages the relationship you depend on.
A few honest limits
The cycle is an average and a simplification. Festival months stretch your stock days, and a run of returns delays money you thought was coming. Use it to compare yourself with last quarter and as a planning aid, not as an exact promise.
Write the three numbers on a card and update them each month. If the cycle grows, something is getting stuck, and you can usually find it quickly: a pile of unsold stock, a courier delay, or a supplier who wants earlier payment.
To see the effect of COD delays by itself, read how much cash gets stuck waiting for COD payouts. For the bigger picture of cash in the business, start with what working capital is.