Updated:
December 30, 2025
12 min
The Growth Paradox That Bankrupts Profitable Businesses
Rapid growth can actually bankrupt a company. It sounds absurd, but it's one of the most common ways otherwise successful ecommerce businesses fail.
Here's how it works: You sell a product. That sale generates profit on paper. But before you can collect revenue, you've already paid for inventory, shipping, packaging, and marketing. The cash gap between when you pay suppliers and when customers pay you creates a working capital deficit.
Now scale that gap. If your cash conversion cycle is 60 days and you're growing 10% month-over-month, you need more cash every month to fund the next round of inventory purchases-cash you won't receive for another 60 days. Growth compounds the deficit faster than profit fills it.
Most consumer brands have a positive CCC-cash is tied up in inventory for a period of time. The question isn't whether you have a cash gap; it's whether you can manage it without running out of runway.
The cash conversion cycle (CCC) quantifies exactly how long your money is locked up between paying for inventory and receiving customer payment. It's the heartbeat of your working capital health.
Why Profit Doesn't Equal Cash
The profit and loss statement tells you whether you're making money. The cash conversion cycle tells you when you'll have it.
Consider an ecommerce brand with these characteristics:
Orders inventory 90 days before sale (lead time)
Pays suppliers 30 days after receipt
Sells inventory 45 days after receipt
Receives payment immediately (credit card processing)
The cash timeline:
Day 0: Order placed with supplier
Day 90: Inventory received
Day 120: Supplier paid (30-day terms)
Day 135: Product sold
Day 137: Payment received (2-day processor hold)
Time from cash out to cash in: 17 days
But what if the business grows? If next month requires 20% more inventory, the supplier payment increases 20% while the revenue from previous inventory trickles in. The 17-day gap must be funded with working capital.
A negative CCC means the company receives payment from customers before paying suppliers. This lets the business use customer cash to fund inventory-the holy grail of working capital efficiency.
Most ecommerce businesses operate with positive CCC, meaning they must fund the gap themselves or through external capital.
The Cash Conversion Cycle Formula
The cash conversion cycle measures the net time (in days) between paying for inventory and receiving customer payment.
The Formula:
> Cash Conversion Cycle (CCC) = DIO + DSO - DPO
Where:
DIO = Days Inventory Outstanding (how long inventory sits before selling)
DSO = Days Sales Outstanding (how long before customers pay)
DPO = Days Payable Outstanding (how long before you pay suppliers)
Component Calculations:
> DIO = (Average Inventory ÷ COGS) × 365 > DSO = (Average Accounts Receivable ÷ Revenue) × 365 > DPO = (Average Accounts Payable ÷ COGS) × 365
Example Calculation:
An Australian supplement brand:
Average Inventory: $280,000
Average Accounts Receivable: $15,000 (marketplace holds)
Average Accounts Payable: $95,000
Annual COGS: $1,200,000
Annual Revenue: $2,400,000
DIO = ($280,000 ÷ $1,200,000) × 365 = 85 days DSO = ($15,000 ÷ $2,400,000) × 365 = 2 days DPO = ($95,000 ÷ $1,200,000) × 365 = 29 days
CCC = 85 + 2 - 29 = 58 days
This business has 58 days where cash is tied up in working capital-nearly two months of capital locked in the operating cycle.
CCC Benchmarks for Ecommerce
Retailers tend to have the best working capital cycle at around nine days, as customers pay with cash at point of sale, translating into low receivables. However, this benchmark reflects traditional retail, not ecommerce.
Ecommerce CCC varies significantly based on business model and supply chain structure.
Ecommerce CCC Benchmarks by Model:
Business Model | Typical CCC | Target CCC | Key Driver |
|---|---|---|---|
Dropship | 0-15 days | <10 days | No inventory holding |
Print-on-Demand | 5-20 days | <15 days | Make-to-order |
DTC (domestic sourcing) | 30-60 days | <45 days | Inventory holding |
DTC (offshore sourcing) | 60-120 days | <90 days | Long lead times |
Wholesale/B2B | 45-90 days | <60 days | Receivables delay |
Marketplace Seller | 40-80 days | <50 days | Platform payment holds |
Category Benchmarks:
Category | Typical DIO | Typical CCC | Notes |
|---|---|---|---|
Fashion | 60-90 days | 50-80 days | Seasonal inventory challenges |
Beauty/Skincare | 45-75 days | 35-60 days | Moderate shelf stability |
Supplements | 60-90 days | 45-70 days | Expiration management |
Electronics | 30-60 days | 25-50 days | Fast-turning, obsolescence risk |
Home/Furniture | 75-120 days | 60-100 days | Longer purchase cycles |
Food/Beverage | 15-30 days | 10-25 days | Perishability drives speed |
Australian Market Considerations:
Australian ecommerce typically operates with longer CCC than US equivalents due to:
Offshore sourcing with extended shipping times (add 2-4 weeks to lead times)
Currency conversion timing
Higher safety stock requirements
Smaller supplier power (less negotiating leverage for terms)
Add 15-30 days to US benchmarks for realistic Australian targets.
The Working Capital Velocity Framework
The Working Capital Velocity Framework provides a systematic approach to reducing cash conversion cycle. It operates across the three CCC components: inventory, receivables, and payables.
I developed this framework after seeing too many profitable brands struggle with cash flow. They generated good margins on paper but never had cash in the bank. The problem was always the same: they focused on profitability metrics while ignoring velocity metrics. A 58-day CCC at $2.4M revenue requires over $380,000 in working capital-money that could fund growth, negotiate better supplier terms, or survive downturns.
Component 1: Days Inventory Outstanding (DIO)
DIO is typically the largest component of ecommerce CCC. Reducing inventory days frees working capital faster than any other lever.
DIO Improvement Strategies:
Demand Forecasting: Better forecasting means tighter inventory-less overstock, fewer stockouts, faster turns.
Implement demand planning tools
Analyse seasonality patterns
Monitor leading indicators (search trends, social mentions)
Adjust forecasts weekly, not quarterly
SKU Rationalisation: A lower cash cycle means less time gap between buying inventory, making sales, and receiving cash. Eliminate slow-moving SKUs that drag down average DIO.
Audit bottom 20% of SKUs by turnover
Discontinue or liquidate poor performers
Concentrate inventory in high-velocity items
Lead Time Reduction: Shorter lead times enable smaller, more frequent orders.
Identify domestic or regional suppliers
Negotiate production time improvements
Consider air freight for fast-moving items
Pre-position inventory with suppliers
Safety Stock Optimisation: Excessive safety stock inflates DIO unnecessarily.
Calculate optimal safety stock by SKU
Accept higher stockout risk on slow movers
Use just-in-time principles where possible
Component 2: Days Sales Outstanding (DSO)
For most B2C ecommerce, DSO is minimal-customers pay at checkout, and payment processors settle within 1-3 days.
However, DSO increases for:
B2B/wholesale operations (net-30, net-60 terms)
Marketplace sellers (platform payment holds)
International transactions (currency settlement delays)
DSO Improvement Strategies:
Payment Processor Optimisation:
Negotiate faster settlement (next-day vs. 3-day)
Use instant payout options (for a fee, if cash-critical)
Avoid processors with extended holds
Marketplace Payment Acceleration: Amazon and other marketplaces hold funds 14-21 days for new sellers.
Build account history to reduce holds
Request accelerated disbursements
Diversify across marketplaces to smooth cash flow
B2B Terms Management:
Offer early payment discounts (2% net-10 vs. net-30)
Require deposits on large orders
Implement automated payment reminders
Use invoice factoring for immediate cash
Component 3: Days Payable Outstanding (DPO)
DPO reduces your CCC-the longer you take to pay suppliers, the less cash tied up in the cycle. But extending payables has limits and relationship costs.
DPO Improvement Strategies:
Negotiate Better Terms:
Request 30-day terms instead of prepay
Ask for 60-day terms on large orders
Offer volume commitments in exchange for extended terms
Strategic Payment Timing:
Pay on the due date, not before
Batch payments to optimise cash flow timing
Use payment scheduling to maximise float
Supplier Financing:
Use trade credit where available
Consider supply chain financing programmes
Negotiate consignment arrangements for slow movers
Warning: Extending payables damages supplier relationships if done aggressively. Balance DPO optimisation with supplier partnership needs.
The CCC Optimisation Calculator
Use this calculator to determine your current CCC and identify improvement opportunities.
Step 1: Gather Inputs
Input | Your Value | Example |
|---|---|---|
Average Inventory | $_____ | $180,000 |
Average Accounts Receivable | $_____ | $12,000 |
Average Accounts Payable | $_____ | $65,000 |
Annual COGS | $_____ | $900,000 |
Annual Revenue | $_____ | $1,800,000 |
Step 2: Calculate Components
> DIO = (Avg Inventory ÷ COGS) × 365 > DSO = (Avg AR ÷ Revenue) × 365 > DPO = (Avg AP ÷ COGS) × 365
Example:
DIO = ($180,000 ÷ $900,000) × 365 = 73 days
DSO = ($12,000 ÷ $1,800,000) × 365 = 2 days
DPO = ($65,000 ÷ $900,000) × 365 = 26 days
Step 3: Calculate CCC
> CCC = DIO + DSO - DPO
Example: 73 + 2 - 26 = 49 days
Step 4: Calculate Working Capital Requirement
> Daily COGS = Annual COGS ÷ 365 > Working Capital Required = CCC × Daily COGS
Example:
Daily COGS = $900,000 ÷ 365 = $2,466
Working Capital Required = 49 × $2,466 = $120,834
This business needs approximately $121K in working capital to fund 49 days of operating cycle.
Step 5: Model Improvement Scenarios
Scenario | DIO | DSO | DPO | CCC | Working Capital |
|---|---|---|---|---|---|
Current | 73 | 2 | 26 | 49 | $120,834 |
Improve DIO 10 days | 63 | 2 | 26 | 39 | $96,174 |
Extend DPO 10 days | 73 | 2 | 36 | 39 | $96,174 |
Both improvements | 63 | 2 | 36 | 29 | $71,514 |
Improving both DIO and DPO by 10 days each reduces working capital requirement by $49,320-capital that can fund growth instead of operations.
CCC and Growth Funding
The cash conversion cycle is the aggregate amount of time you hold inventory, wait to get paid once you sell it, and pay your suppliers. For growing businesses, CCC determines how much capital growth requires.
Growth Capital Calculation:
> Additional Working Capital = (New Monthly COGS - Current Monthly COGS) × (CCC ÷ 30)
Example:
A business growing from $100K to $150K monthly revenue (50% growth):
Current monthly COGS: $50,000
New monthly COGS: $75,000
CCC: 60 days
Additional Working Capital = ($75,000 - $50,000) × (60 ÷ 30) = $50,000
Growing 50% requires $50,000 in additional working capital-capital that won't return for 60 days. Without this capital, growth stalls.
The Negative CCC Advantage:
Companies with negative CCC (like Amazon) collect customer payment before paying suppliers. This means growth generates cash rather than consuming it.
For most ecommerce businesses, achieving negative CCC is difficult but instructive as a directional goal. Every day reduced from CCC decreases growth capital requirements.
The 60-Day CCC Optimisation Sprint
Phase 1: Measurement (Days 1-15)
Week 1: Data Collection
Calculate average inventory (12-month average)
Calculate average accounts receivable
Calculate average accounts payable
Determine annual COGS and revenue
Week 2: Component Analysis
Calculate DIO, DSO, DPO separately
Compare each to category benchmarks
Identify largest gap (usually DIO)
Prioritise improvement focus
Phase 2: Quick Wins (Days 16-35)
Week 3: Inventory Quick Wins
Identify bottom 20% SKUs by turnover
Launch liquidation promotion for slow movers
Reduce reorder quantities for moderate movers
Week 4: Payables Quick Wins
Review all supplier terms
Identify suppliers on prepay or short terms
Request term extensions (30→45 days)
Week 5: Receivables Quick Wins
Review payment processor settlement times
Negotiate faster settlement if available
Implement early payment incentives for B2B
Phase 3: Systematic Improvement (Days 36-60)
Week 6-7: Process Implementation
Implement demand forecasting improvements
Establish reorder point automation
Create payment timing calendar
Week 8: Review and Iterate
Recalculate CCC with new data
Measure working capital improvement
Plan next optimisation cycle
CCC Monitoring Dashboard
Weekly Metrics
Metric | Formula | Target |
|---|---|---|
Days Inventory Outstanding | (Avg Inventory ÷ COGS) × 365 | Category benchmark |
Days Sales Outstanding | (Avg AR ÷ Revenue) × 365 | <3 days (B2C) |
Days Payable Outstanding | (Avg AP ÷ COGS) × 365 | Negotiate maximum |
Cash Conversion Cycle | DIO + DSO - DPO | Category benchmark |
Working Capital Requirement | CCC × Daily COGS | Minimise |
Monthly Review
Trend analysis (is CCC improving month-over-month?)
Component analysis (which element is driving changes?)
Growth impact assessment (how much capital does next month require?)
Supplier term review (opportunities to extend DPO?)
The New North Star Metric: Cash Efficiency Ratio
Stop tracking CCC in isolation. Start measuring your Cash Efficiency Ratio (CER)-the amount of gross profit generated per dollar of working capital deployed.
The Calculation:
Interpretation:
CER > 6: Excellent-generating substantial profit per dollar of working capital
CER 3-6: Good-efficient capital deployment
CER 1-3: Marginal-capital intensity hurting returns
CER < 1: Critical-business consumes more capital than it generates
This metric reveals whether your cash cycle optimisation translates to actual profitability. A 30-day CCC with low gross margin can underperform a 60-day CCC with high gross margin. CER captures the complete picture.
The Working Capital Efficiency
For ecommerce businesses, CCC is a critical metric as it directly impacts liquidity and working capital. A negative or very short CCC indicates efficient management, while a longer CCC could strain cash flow.
Your CCC determines whether growth funds itself or requires external capital. It determines whether profitable businesses survive or fail.
Measure it. Optimise it. Monitor it relentlessly.
Your survival depends on it.
