Cash conversion cycle

Cash conversion cycle (CCC) measures how long cash is tied up in operations before returning. Formula: Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding. For service businesses with limited inventory, simplified: DSO - DPO.

The typical cycle: pay for parts (cash out), perform service (more cash out for labor), invoice customer, wait for customer payment (cash returns). The shorter the cycle, the less working capital required to support a given revenue level. Operations with short CCC can grow more easily; operations with long CCC need to fund growth from external capital.

For service operations, key CCC drivers: parts payment terms (longer payable terms = longer DPO = shorter CCC), DSO (faster customer payment = shorter CCC), inventory carrying (less truck stock = less cash tied up). Many service operations can achieve negative CCC — collecting payment from customers before paying suppliers — through aggressive payment terms with customers (deposits, on-completion payment) and standard 30-day terms with suppliers.

Negative CCC is the gold standard for service business cash management. It means growth funds itself from operations rather than requiring external capital. Operations achieving it typically combine: deposits on large jobs, on-completion card payment for routine work, recurring billing for plan customers, 30-day terms with suppliers, and minimal inventory carrying.