Cash conversion cycle

Definition

The days between paying for inventory and collecting on the sale.

Why It Matters

A long cycle ties up working capital you have to fund, so a growing business with a slow one can be cash-starved while perfectly profitable. That is the trap the first year after closing springs on buyers who read the profit line and nothing else: growth consumes cash before it produces any. The cycle is what the working-capital peg is really trying to price, and a business with a negative one, paid before it pays, funds its own growth.

In numbers: 40 days of inventory plus 55 days to collect minus 30 days to pay suppliers is a 65-day cash conversion cycle, often $50k or more of working capital the owner must fund.