Cash Conversion Cycle.
Right-size the revolver, not the regret.
Most small-business revolvers are either too small (chronic overdraft fees, supplier credit holds) or too generous (lazy AR collection, idle commitment fees). The right size falls out of the working-capital math: how much cash is tied up in inventory and receivables, minus what suppliers are financing, scaled for seasonality and a sensible headroom buffer. This tool does that calculation in one screen.
The Math, in Plain Terms
Every operating business has cash trapped between two events: paying for inventory or labor, and collecting from customers. The cash conversion cycle measures the duration of that trap in days. The shorter the trap, the less working capital you need to fund operations — and the smaller the line of credit your business actually requires.
The formula has three components:
- Days Inventory Outstanding (DIO) = Average Inventory ÷ COGS × 365. How long inventory sits before it sells.
- Days Sales Outstanding (DSO) = Average AR ÷ Revenue × 365. How long invoices sit before customers pay.
- Days Payable Outstanding (DPO) = Average AP ÷ COGS × 365. How long you sit on supplier invoices before paying.
Add the first two, subtract the third, and you have the CCC. A 75-day CCC means the business is funding 75 days of operations out of its own pocket before customer cash comes in. Multiply that by daily expenses and you get the dollar size of the working-capital trap.
From CCC to Line of Credit
The mechanical translation from CCC to LOC has three steps:
- Compute the operating working-capital gap. Inventory + AR − AP. This is the dollar amount of the trap, on average.
- Apply a seasonality multiplier. If the business runs at 1.5x average inventory in October–December, the multiplier is 1.5. Don't size the revolver to the average — size it to the peak.
- Apply a headroom multiplier. 1.20x–1.30x is standard. The buffer absorbs unexpected slow-pay events, supplier price hikes, and growth.
Most community banks will quote a revolver up to 75%–80% of this number on first ask. They expect the borrower to negotiate up if the seasonality reasoning is solid.
Industry Benchmarks (2023–2025 Medians)
| Industry | DIO | DSO | DPO | CCC |
|---|---|---|---|---|
| Retail (general) | 70 | 12 | 45 | 37 |
| Manufacturing | 95 | 55 | 50 | 100 |
| Wholesale / distribution | 60 | 45 | 40 | 65 |
| Services | 5 | 50 | 30 | 25 |
| Construction | 25 | 70 | 45 | 50 |
| Restaurant | 8 | 4 | 35 | −23 |
If your CCC is 50% above the industry median, the bank will ask why. The honest answers are usually one of: slow-pay customer concentration, inventory build for a known seasonal peak, or operational inefficiency. The first two are financeable; the third is a turnaround problem that a revolver won't fix.
Negative CCC — What It Means
A handful of businesses run with negative CCCs: discount retailers (Costco, Walmart), restaurants paying suppliers net-30 while collecting cash from customers same-day, and large platform companies with prepaid customer deposits. A negative CCC is a powerful position because the supplier base is effectively financing your growth. These businesses still take revolvers, but they're sized for contingency rather than for the working-capital trap — covenant lite, lower commitment, lower cost.
What Bankers Actually Look At
- Trend, not point estimate. Compare last fiscal year's CCC to the prior year. A widening cycle is the early warning sign of a stretching customer base or a bloated inventory.
- AR aging, not just average AR. A 60-day average DSO with 25% of receivables 90+ days past due is a different deal than a clean 60-day DSO.
- Inventory turns by SKU. A blended DIO of 80 days can hide 30-day fast movers and 200-day dead stock.
- Customer and supplier concentration. If one customer is 40% of AR or one supplier is 50% of AP, the working-capital math is wrong — it's actually a counterparty-risk story.
Related Tools and Reading
- Global Cash Flow Calculator — for the term-loan piece of a unitranche request that sits alongside the revolver.
- FCCR Simulator — model the covenant the revolver agreement will likely include.
- Factoring & MCA Calculator — when AR finance is more efficient than a traditional revolver.
- Business Term Loan Calculator — for the long-term debt portion of the capital stack.
Frequently Asked
Should I use opening, closing, or average balances?
Average — typically the simple average of the opening and closing balance for the period. For seasonal businesses, monthly average is more accurate. Using only the year-end balance can dramatically understate or overstate the cycle depending on the season.
Why do you use revenue for DSO and COGS for DIO and DPO?
Receivables are recorded at sales price (revenue), so revenue is the right denominator. Inventory and payables are recorded at cost, so COGS is the right denominator. Using one denominator for all three is a common shortcut that produces a wrong answer.
What about prepayments from customers?
Prepayments reduce the effective DSO — record customer deposits as a liability and net them against AR for the cycle math. Most software businesses with annual prepay arrangements see meaningfully lower CCCs than their statutory AR balance suggests.
How does the revolver interact with a term loan?
The revolver funds working capital; the term loan funds long-life assets (real estate, equipment, acquisitions). Mixing them is a classic small-business mistake — using a 5-year term loan to plug a working-capital hole means you're amortizing a problem that should be revolving, and paying for it with rigid principal payments.
Will a bank rely on this calculator's number?
No. This is a directional sizing tool. The bank will run its own borrowing-base analysis with eligibility filters (concentration, aging, foreign AR, slow-moving inventory categories), and the final commitment will reflect that more conservative number.