Glossary
Cash conversion cycle
The cash conversion cycle counts the days between paying for something and being paid for it: inventory days plus receivable days, less payable days. A shorter cycle means the business funds itself, and a longer one means growth eats cash and the bank gets a phone call. It is the number that explains a profitable company running out of money.
01
Why a profitable company can still run out of cash
A monthly figure for the leadership review, since every part of it waits on the close. On the weekly board, the pieces that move are invoices sent the day work finished, collection calls made, and cash collected. Those three rows are what shortens the cycle, and each one can carry a name and be read out on a Monday.
Growth consumes cash before it produces any, and this cycle is the measure of how much. A company with a sixty-day cycle is funding two months of its own growth, which is how fast-growing businesses fail while profitable on paper. Shortening it is usually a matter of billing sooner rather than negotiating harder, and billing sooner is entirely yours to control.
Worked example: A specialty food wholesaler grew orders by forty percent in a year and ran out of working capital in November. Inventory days had gone from thirty-one to fifty-two as the range widened, while payment terms stayed at thirty days in both directions. Cutting eleven slow lines and invoicing on dispatch took nineteen days out of the cycle.
Sources: klipfolio.com/kpis/financial; Analyzing liquidity using the cash conversion cycle, Journal of Accountancy (2013)
Days sales outstanding
Days sales outstanding is the average time it takes to collect an invoice, calculated as receivables divided by revenue, times the days in the period.
02Gross margin
Gross margin is revenue minus the direct cost of delivering it, as a percentage: a ten thousand dollar job costing six thousand runs at forty percent.
03Lagging indicator
A lagging indicator reports a result after the period that produced it has closed: revenue, gross margin, employee turnover, satisfaction scores.
04KPI examples by department: sales, ops, finance, HR
Concrete KPI examples for each department in a small company, tagged leading or lagging and weekly or monthly, to help you build a Scorecard that works.
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