If you run an ecommerce business and you’ve ever asked, “Why am I profitable on paper but constantly short on cash?”, this is for you.
There’s one metric that explains this disconnect better than almost anything else: the cash conversion cycle.
This isn’t an accounting metric.
It’s a cash survival metric.
If you understand your cash conversion cycle, you can make better decisions around inventory, purchasing, payment terms, and growth.
If you don’t, growth can quietly kill your business.
Profit Does Not Equal Cash
Most ecommerce owners track revenue. Some track gross margin. Very few truly understand their cash flow.
And that’s where problems start.
You can look profitable on your profit and loss statement while your bank balance keeps going down. That’s not because the numbers are wrong. It’s because profit and cash are two very different things.
The cash conversion cycle helps explain why.
At its simplest, it answers one question: How long does my cash get stuck before it comes back to me?
Why the Cash Conversion Cycle Matters
Every ecommerce business pre-funds growth.
You buy inventory before you sell it. You pay suppliers before customers pay you. You wait for payouts from Shopify, Amazon, or wholesale partners.
The longer that cycle is, the more cash you need just to stand still.
Here’s the dangerous part: A fast-growing ecommerce business with a long cash conversion cycle can go broke faster than a slower-growing business with a short one.
Growth doesn’t solve cash problems. Sometimes it makes them worse.
That’s why understanding this metric is non-negotiable.
What the Cash Conversion Cycle Actually Measures
At its core, the cash conversion cycle measures the time between paying cash out and getting cash back in.
It has three parts, and every ecommerce business has all three.
- How long inventory sits before it sells
- How long it takes to actually receive the money
- How long you wait to pay suppliers
Put together, these determine how long your cash is tied up.
Days Inventory Outstanding (DIO)
Days Inventory Outstanding answers this question: How long does inventory sit before it sells?
For most ecommerce brands, this is the biggest driver of cash pain.
The formula looks like this:
Average Inventory ÷ Cost of Goods Sold × 365 (# of days of the period you’re looking at)
In plain English, you’re comparing how much inventory you’re holding to how much inventory you sell in a year, then converting that into days.
Long DIO usually comes from:
- Overbuying inventory
- Too many SKUs
- Long lead times
- Slow-moving products hiding in bundles
The longer inventory sits on a boat, a truck, or a warehouse shelf, the longer your cash stays trapped.
Days Sales Outstanding (DSO)
Days Sales Outstanding answers this question: How long does it take to actually get paid after a sale?
The formula is:
Accounts Receivable ÷ Revenue × 365
In plain English, it’s how much money customers or platforms owe you compared to how much you sell, converted into days.
For ecommerce businesses, this varies a lot by channel.
- Shopify direct-to-consumer usually has very low DSO.
- Amazon has longer DSO due to payout timing and reserves.
- Wholesale often runs 30, 60, or more days.
The moment you add wholesale, DSO jumps. And when DSO jumps, cash pressure follows.
Days Payable Outstanding (DPO)
Days Payable Outstanding answers this question: How long do you take to pay your suppliers?
The formula is:
Accounts Payable ÷ Cost of Goods Sold × 365
In plain English, it’s how much you owe suppliers compared to how much inventory you sell, converted into days.
If you prepay inventory, your DPO is near zero. If you have net 30 or net 60 terms, DPO increases.
And higher DPO helps cash flow.
The Full Cash Conversion Cycle
Here’s the full formula:
Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding = Cash Conversion Cycle
In plain English:
- How long inventory sits
- Plus how long you wait to get paid
- Minus how long you wait to pay suppliers
That final number is how many days your cash is tied up.
What Big Companies Get Right: Dell and Costco
This concept really clicks when you look at companies that have mastered it.
Dell
Dell is famous for running a negative cash conversion cycle.
- They get paid quickly.
- They hold minimal inventory.
- They negotiate long supplier terms.
In many cases, Dell gets paid before it pays its vendors. Their cash conversion cycle has often been negative, meaning suppliers are effectively funding Dell’s growth.
Costco
Costco is another powerful example.
- They turn inventory extremely fast.
- They get paid immediately by customers.
- They pay vendors later.
Even with thin margins, Costco generates massive cash flow because cash moves faster than profits.
Cash velocity beats margin.
What This Looks Like in Real Ecommerce Businesses
In practice, I commonly see ecommerce brands with days inventory outstanding of 90 days or more.
Inventory Bloat
Some brands carry 180 to 240 days of inventory.
They prepay suppliers. They have normal DTC payout timing.
Margins look fine on paper. Cash feels tight every single month.
The problem isn’t sales. It’s inventory sitting too long.
Wholesale Expansion Gone Wrong
Another common story looks like this:
A brand adds wholesale. They offer net 60 terms. Order sizes increase.
Revenue grows. Cash shrinks.
Wholesale increases days sales outstanding and often days inventory outstanding at the same time. If you don’t model that impact, payroll can get stressful fast.
Improving Cash Without Growing Sales
Some of the biggest wins don’t come from selling more.
They come from:
- Negotiating better supplier terms
- Cutting low-velocity SKUs
- Tightening reorder points
No new ad spend. No new sales channels.
Just better cash discipline.
The Takeaway & How LedgerGurus Can Help
If revenue tells you how big your business is, and profit tells you how healthy it looks, the cash conversion cycle tells you whether it can survive growth.
Ecommerce businesses don’t always fail because they’re unprofitable. They fail because cash gets trapped too long.
Here’s your next step: Look at how long your cash is tied up today. For most brands, inventory is the first place to focus.
Cash stress doesn’t mean your business is broken. It means your systems need attention.
We help ecommerce brands clean up inventory, shorten their cash conversion cycle, and build financial systems that support growth instead of fighting it.
Explore our ecommerce accounting services and see if we’re the right fit for your business.
