Cash flow cycle
The cash flow cycle is the number of days between when money leaves your pocket and when it comes back. It starts the day you buy inventory or pay an ad bill and ends the day your delivery partner deposits the cash-on-delivery collection into your account. The longer the cycle, the more capital you need to run the same volume.
Also calledcash cycleworking capital cyclecash conversion cycle
The formula
Cash flow cycle (days) = Days inventory outstanding + Days to collect – Days payable outstanding
- Days inventory outstanding: the average time between inventory arriving at your store and shipping it in a parcel.
- Days to collect: the time from shipping the parcel until its value reaches your account from the delivery company.
- Days payable outstanding: the time your supplier gives you to pay for the inventory; zero if you pay cash on purchase.
- Cash tied up = Average daily spend × Number of days in cycle.
Worked example
Calculating tied-up cash for a Morocco merchant
- 1Days inventory outstanding: 20 days.
- 2Days to collect from delivery company: 18 days.
- 3Supplier terms: 0 (cash payment at purchase).
- 4Cycle length: 20 + 18 – 0 = 38 days.
- 5Average daily spend (inventory + ads): 3,000 MAD.
- 6Cash tied up: 3,000 × 38 = 114,000 MAD.
- 7If you negotiate 15-day payment terms: 20 + 18 – 15 = 23 days → 3,000 × 23 = 69,000 MAD.
Takeaway: Negotiating 15-day payment terms freed up 45,000 MAD in working capital without selling a single extra unit.
What it means in practice
Profit and liquidity are different things. A merchant profitable on paper can stop buying because money is trapped in inventory and parcels in transit. The number that sets your growth ceiling isn't margin alone—it's how many days each dirham stays out of your pocket before it comes back with its profit attached.
In cash-on-delivery you spend on ads daily while deposits come in scattered batches. This timing gap alone can break merchants who scale their budget after a strong sales week, only to find they're out of cash before last week's collection deposit arrives.
Three practical ways to shorten the cycle: negotiate payment terms from your supplier, cut slow-moving inventory to reduce days outstanding, and ask your delivery partner for faster payouts or find one that deposits weekly. Every day you cut releases cash equal to your daily spend.
Common mistakes
- Confusing profit with liquidity: great margins at month-end while you can't buy more because money is still at the delivery company.
- Scaling your ad budget after a strong week of orders, before last week's deposit arrives.
- Ignoring returned parcels in your calculation: the goods come back but their days are lost and shipping was paid twice with no revenue.
- Buying in bulk to cut unit cost, which stretches days inventory outstanding and eats the savings you gained on price.
Questions and answers
How do I calculate days inventory outstanding?
Divide your average inventory value during the period by your daily cost of goods sold. Simple example: average inventory of 60,000 units with daily COGS of 3,000 → 20 days. The faster you sell with the same inventory, the shorter this number becomes and the more cash you free up.
What stretches the cycle most in cash-on-delivery?
Your delivery partner's deposit schedule and delivery time itself. The parcel stays in transit for days, then the payment waits for the next deposit cycle. Add returned parcels that eat the full cycle time and come back with zero collection.
Does a shorter cycle mean higher profit?
Not higher profit per order, but more cycles per year with the same capital. Money that turns every 23 days works more than twice as hard as money that turns every 50 days, compounding your profit from the same capital.
How much cash should I keep in reserve?
At least enough to cover your daily spend for one full cycle, because that's the amount always trapped outside your pocket. If you spend 3,000 daily with a 38-day cycle you need roughly 114,000 in reserve at all times, and any scale-up lifts this number by the same proportion.