Excerpted from

FastTrac® GrowthVenture™

Calculating Cash Cycle

Although these ratios seem to be designed for product-based businesses, the theory
behind each ratio is also valid for service-based businesses. Difficulty in calculating
these ratios could arise if your service-based company’s financial statements do not
include the numbers needed to calculate some of these ratios, such as Cost of Sales.
With the help of an accountant, your accounting system can be designed to yield
the figures you need to calculate your cash cycle. It will be worth the effort, as these
controls will help you tighten your cash cycle. Use the following table to help you
calculate and analyze your own cash cycle in Cash Cycle on p. 2.

Ratio Formula EXAMPLE Clean Corp 2005

Days Receivable
( Average Accounts Receivablea
Sales per year
x 365 days
) ( 236,000
1,843,014 ) x 365 = 47c days

Days Inventory
( Average Inventorya
Annual COGS or Cost of Sales
x 365 days
) ( 145,000
1,032,088 ) x 365 = 51 days

Days Payable
( Average Accounts Payablea
Annual COGS or Cost of Sales
x 365 days
) ( 58,000
1,032,088 ) x 365 = 21 days

Days Payroll Accrual

( Average Payroll Accrualab
Annual COGS or Cost of Sales
x 365 days
) ( 54,000
1,032,088 ) x 365 = 19 days

Cash Cycle + Days Receivable + 47 + 51 - 21 - 19 = 58 days

+ Days Inventory
- Days Payable
- Days Payroll Accrual

a These calculations use average monthly balances for Accounts Receivable, Inventory, Accounts Payable, and Payroll to eliminate any
fluctuation based on seasonal activity.
b To calculate Days Payroll Accrual, Average Payroll Accrual should be the average amount of money that your business pays out for a payroll
cycle. Payroll cycles would be determined by how frequently you pay your employees—every two weeks, semi-monthly, or monthly.
c Many business activities, such as bank deposits, check writing, and payroll processing, happen no more than once each day. Therefore, all
cash cycle ratios are rounded up to the next day. For example, Clean Corp’s Days Inventory calculates to 52.2, which is rounded up to 53.
This assumes that the transaction will take place on the 53rd day.

© 2006 Ewing Marion Kauffman Foundation. All Rights Reserved. 

Taking Action Calculating Cash Cycle

Cash Cycle

First, calculate your cash cycle. Then identify ways to improve your internal source of cash.

Ratio Formula Result

+ Days Receivable
( )
Average Accounts Receivable x 365 days
Sales per year

+ Days Inventory
( Average Inventory
Annual COGS or Cost of Sales )
x 365 days

- Days Payable
( Average Accounts Payable
Annual COGS or Cost of Sales )
x 365 days

- Days Payroll Accrual

( Average Payroll Accrual
Annual COGS or Cost of Sales ) x 365 days

Cash Cycle + Days Receivable

+ Days Inventory
- Days Payable
- Days Payroll Accrual

I will implement the following ideas to shorten my cash cycle and improve internal cash flow:
Accounts Receivable – My goal is to receive payments as soon as possible.
o Use an aging report to identify late payers.
o Aggressively pursue overdue accounts.
o Offer incentives for prompt payment.
o Put unreliable payers on shorter payment terms or COD (Cash on Delivery).
o Bill on a timely basis.
o Offer convenient payment options, such as cash, credit cards, or checks.

Inventory – My goal is to keep inventory moving as fast as possible.

o Make wise inventory purchases.
o Increase sales, marketing, or other promotional efforts to sell inventory.
o Liquidate slow-moving or obsolete inventory.
o Seek extended payment terms for my purchases of raw materials and inventory.

Accounts Payable – My goal is to hold payments as long as possible without incurring penalties (such as past-due charges)
by taking longer than is allowed by the vendors.
o Buy from firms offering longer payment terms.
o Don’t pre-pay without receiving adequate benefit.
o Negotiate payment terms that allow me to pay in strategic intervals based on when the services are delivered.

Payroll Accrual – My goal is to keep payroll cash as long as possible without improving my own cash position on
the backs of my employees.
o M ake sure my paydays are similar to others in my industry, being careful about changing the paydays just to
improve the company’s cash position.

© 2006 Ewing Marion Kauffman Foundation. All Rights Reserved.