Where is my cash? Days of stock and the cash cycle

Profit is not cash

A business can show a profit and still run short of cash. The profit is real, but the money is somewhere else: sitting on a shelf as stock, or owed to you by customers who have not paid yet.

It takes 3 numbers to see where it went.

1. Days of stock

How many days it takes to sell what you are holding. Stock is cash you have already spent. If you hold 90 days of stock, you paid for three months of sales in advance.

Slow items push this number up quietly. A regular look at what has not moved is usually the fastest way to free cash.

2. Days customers take to pay you

If you sell on credit, every unpaid invoice is cash you are lending. A business that sells for cash at the counter has this at zero, which is one reason retail can run on thin margins.

3. Days you take to pay suppliers

This one works in your favour. While you have not yet paid a supplier, their goods are funding your business. Paying on the agreed terms, not earlier, is free finance. Paying late is a different matter: it costs you trust and, in time, terms.

Put them together

Days of stock, plus days customers take to pay, minus days you take to pay suppliers. The result is your cash cycle: how long each ringgit is tied up before it comes back.

A made-up example: 60 days of stock, 0 days from customers, 30 days to suppliers. The cash cycle is 30 days. Cut stock to 45 days and it drops to 15, with no change in sales at all.