You Can Only Stretch Your Vendors Once

A $14M distributor told me in the spring that their cash conversion cycle had improved by six days year over year. Board deck called it working capital discipline. I asked to see the three components.

Days sales outstanding: up four. Days inventory outstanding: down two. Days payable outstanding: up eight.

Nobody had gotten better at anything. They'd paid their vendors later.

Deloitte found the same thing at scale

Deloitte's Working Capital Roundup covers more than 2,300 companies, and its read on last year is that cash conversion tightened by roughly a day. Underneath that, DIO fell and DPO extended while DSO rose, because collections kept getting harder. Same shape as my distributor, one decimal place bigger. Deloitte's own language for it is that the gains reflected day-to-day management rather than durable efficiency.

Which is the polite way of saying most of the improvement was borrowed.

One of these is a stock. The other is a flow.

This distinction is where the number stops being a vanity metric and starts being useful.

Moving from net 30 to net 45 on $400,000 a month of vendor spend releases about $200,000 of cash into your account. That happens exactly once. Next year, on the same terms, the release is zero. To repeat it you go to net 60, then net 75, and somewhere in there your suppliers start saying no or start quoting you differently.

DSO works in the opposite direction. Four extra days on $14M of revenue locks up about $153,000, and unlike the payables gain, it scales with the business. Grow 30% next year and those same four days cost you $200,000. Do nothing about it and the drag compounds while the offsetting credit never repeats.

So a six-day improvement can be a one-time $200,000 benefit sitting on top of a recurring $153,000 problem that gets worse every quarter you grow. Presented as one number, it reads as progress.

A cash conversion cycle is three different businesses reported as a single figure. Netting them tells you nothing about which direction any of them is going.

What I'd change on Monday

Stop reporting CCC as one line. Show DSO, DIO, and DPO separately, each with its own trend, and make somebody own each one.

Then split every working capital gain into repeatable and non-repeatable. Payables extension goes in the non-repeatable column permanently. A collections fix, a deposit policy, a milestone billing change, those go in the repeatable column, because they keep paying as revenue grows.

Watch the price on the borrowed side too. Vendors who fund you notice. It shows up as a lost early-pay discount, or a quiet 3% on your next renewal. That cost never lands in the working capital report, which is precisely why it survives.

Your vendors will fund you once. Your customers will take as long as you let them, every single year.