Cash tied up in invoices and stock means less money to pay suppliers, wages, tax, and loan repayments. When you shorten that cash gap, lenders see lower risk. That boosts serviceability (your ability to repay) and can earn you better rates.
Working capital = money trapped in day-to-day operations:
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Receivables (DSO): customers who owe you
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Inventory (DIO): stock sitting on shelves
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Payables (DPO): time you get to pay suppliers
The Cash Conversion Cycle (CCC)
CCC = DSO + DIO − DPO
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DSO (Days Sales Outstanding): average days to get paid
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DIO (Days Inventory On-Hand): average days you hold stock before it’s sold
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DPO (Days Payables Outstanding): average days you take to pay suppliers
Shorter CCC = cash back faster
Buy materials ──> Hold stock ──> Make/sell ──> Invoice ──> Get paid
↑ ↑ ↑ ↑ ↑
Pay DPO DIO DIO DSO £ in
(days in stock) (days to cash)
CCC = DSO + DIO − DPO → the lower, the better
Cash Flow Cheat Sheet (available in my store)
How to Measure Yours
Grab last 3 months figures (or last full year if easier):
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Sales (incl. VAT if you invoice with VAT consistently): £
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Average Accounts Receivable (your debtors): £
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Cost of Goods Sold (COGS) for the period: £
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Average Inventory: £
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Average Accounts Payable (what you owe suppliers): £
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Number of days in the period: usually 365 (or 90 for a quarter)
Formulas:
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DSO = (Average Receivables ÷ Sales) × Days
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DIO = (Average Inventory ÷ COGS) × Days
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DPO = (Average Payables ÷ COGS) × Days
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CCC = DSO + DIO − DPO
Example
Sales £1,200,000; COGS £720,000; Avg Receivables £150,000; Avg Inventory £180,000; Avg Payables £120,000; Days 365.
DSO = (150,000 ÷ 1,200,000) × 365 ≈ 45.6 days
DIO = (180,000 ÷ 720,000) × 365 ≈ 91.3 days
DPO = (120,000 ÷ 720,000) × 365 ≈ 60.8 days
CCC ≈ 45.6 + 91.3 − 60.8 = 76.1 days
That means cash is tied up for ~76 days before you see it back.
What “Freeing Cash” Looks Like (real numbers)
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Cut DSO by 10 days:
Cash released ≈ (Annual Sales ÷ 365) × 10
With £1.2m sales: £1,200,000 ÷ 365 ≈ £3,288 per day × 10 ≈ £32,880 back. -
Cut DIO by 15 days:
Cash released ≈ (Annual COGS ÷ 365) × 15
With £720k COGS: £720,000 ÷ 365 ≈ £1,973 per day × 15 ≈ £29,600 back. -
Extend DPO by 7 days (fairly):
Cash held ≈ (Annual COGS ÷ 365) × 7 ≈ £13,800 kept for working capital.
Stack those and you can unlock £76k+ without borrowing a penny.
90-Day Action Plan to Free £X
Focus on three levers: DSO, Stock, Credit Terms (incoming & outgoing).
Days 1–14: Quick Wins
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Invoices same-day: send on dispatch/installation. Add PO numbers.
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Deposit or staged billing: 30–40% upfront on custom jobs.
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Early-pay nudge: 1–2% discount if paid in 7 days (only if margin allows).
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Chase rhythm: polite reminders at Day −2 (before due), Day +3, +10.
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Card-on-file or pay link on quotes and invoices.
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Credit checks for new customers over £5k limit.
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Supplier chat: ask for +7 days terms on key lines in return for forecast or slightly larger orders.
Days 15–30: Process & Policy
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Credit policy (1 page): who gets what limit, proof required, who signs off.
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Standard terms: Late fees, interest clause (enforce softly but include).
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Dispute prevention: photo sign-off / delivery note → fewer “we didn’t get it” delays.
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Inventory rules:
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A-items (top 20% by value): weekly review, tight reorder points
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B/C-items: monthly, higher buffers only if truly needed
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Cycle counts: 15 minutes daily in one aisle beats a painful annual count.
Days 31–60: Tooling & Training
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Templates: quote → PO → delivery → invoice = one clean data flow.
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Auto-reminders in your invoicing/accounting app.
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Supplier calendars: set exact order days to hit their production windows and shorten lead times.
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Bundle slow-movers: pair with fast-movers; offer small discounts to convert to cash.
Days 61–90: Optimisation & Leverage
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Vendor Managed Inventory (VMI) trials for A-items if a supplier is willing.
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Consolidate suppliers where it shortens lead time (not just for price).
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Scoreboard: publish weekly DSO, DIO, DPO on a team wall. Reward improvements.
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Finance lever (optional): If you must bridge, consider invoice finance on your best payers or stock finance on forecastable lines—only as a short-term accelerator while you fix the root causes.
How This Improves Lending Outcomes
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Serviceability: Faster cash improves DSCR (cash available vs. loan payments).
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Rate leverage: Lower risk profile = better rates and fee terms.
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Covenants: Stronger working capital usually means fewer covenant headaches.
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Limit increases: Lenders are happier to fund growth when cash cycles are tight.
FAQs (for non-finance owners)
Q: My customers won’t accept shorter terms. Now what?
A: Keep nominal terms but change behaviour: invoice immediately, reduce disputes, offer small early-pay incentives, and introduce card/bank links. Many pay sooner when it’s easy.
Q: Isn’t holding more stock safer?
A: Safety stock is good; excess isn’t. Design levels from real demand & lead time. Move slow-movers first; don’t starve A-items.
Q: Extending supplier terms feels risky.
A: Do it collaboratively: share forecasts, agree delivery slots, and trade a small volume commitment for +7 days. Don’t surprise suppliers.
Q: Should I just get a loan?
A: Fix the cycle first. Then, if needed, use selective tools (invoice finance on your best payers, short-term stock lines) to fund growth, on your terms.
Copy-Paste Checklist
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Same-day invoices with PO and delivery proof
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Auto email/SMS reminders: Day −2, +3, +10
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Upfront deposits on custom/long-lead jobs
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1–2% early-payment incentive (where margin allows)
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Credit policy & limits; checks >£5k
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ABC inventory & weekly A-item review
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Clear reorder points; kill or bundle slow-movers
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Ask key suppliers for +7 days with a forecast
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Weekly scoreboard: DSO, DIO, DPO, CCC
Grab the DSO/Stock/Credit-Policy Playbook
I’ve put together a simple, fill-in-the-blanks playbook:
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Email & call scripts that actually get invoices paid
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1-page credit policy you can adopt today
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Inventory mini-worksheet to cut DIO in a week
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Supplier terms template to negotiate +7 days
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