The cash conversion cycle
Cash conversion is days of inventory, plus days of receivables, minus days of payables. A business holding 45 days of stock, collecting in 60 days and paying suppliers in 30 is funding a 75-day gap out of its own pocket on every order it takes.
Why growth makes it worse
Every new order requires stock and labour before it produces an invoice, and the invoice takes weeks more to convert. Double the order book and you double the funded gap immediately, while the profit arrives months later. This is why overtrading is a leading cause of insolvency among profitable companies.
Matching the facility to the gap
Inventory gap: stock or trade finance. Receivables gap: invoice discounting or factoring. Seasonal peak: a revolving credit facility. Structural gap that never closes: cash-flow term lending, which spreads the permanent element over years rather than refinancing it monthly.
Fixes that cost nothing
Before adding debt, take the free wins: invoice on the day of delivery rather than at month end, take deposits on large orders, tighten credit control on the oldest 20% of the ledger, and renegotiate supplier terms in exchange for volume. These commonly recover two to three weeks of cash.
Frequently asked questions
How much working capital does a business need?
A common benchmark is enough to cover the cash conversion cycle at peak trading plus a buffer of one month's fixed costs. The right number is whatever your own forecast shows at its lowest point, stressed.
Is an overdraft or a revolving facility better?
A committed revolving credit facility cannot be withdrawn on demand in the way an overdraft can, which matters when you are relying on it. It usually carries a commitment fee in exchange.
Last reviewed: 2026-08-15