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The day cash leaves for stock, the day it comes back from a customer, and the days it is tied up between them.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will follow one purchase from the day its supplier is paid to the day its customer pays, count the days the business's own cash is tied up between them, and say which change to the supplier's credit, the selling time or the customer's terms shortens that count the most.
You have built a short cash forecast and seen that a profitable month can end with less money in the account than it started with. This lesson finds the reason in a single purchase: money spent on the way to a sale is gone before the sale pays it back. You need nothing more than the ability to put events on a calendar and subtract one day from another. What is new is the habit of asking, for every purchase, not how much will it earn? but when does the money leave, and when does it come back?
| Term | What it means |
|---|---|
| Supplier credit | The days a supplier allows before its bill must be paid. |
| Customer terms | The days a customer is allowed to take to pay an invoice. |
| Cash cycle | The interval from the day cash leaves to pay for stock to the day it comes back from a sale. |
| Days tied up | The length of the cash cycle, counted in days. |
| Negative cycle | A cycle below zero: customers pay before the supplier must be paid. |
| Account customer | A customer who is invoiced and pays later, rather than at the register. |
Cash is money that has moved: it is in the account, or it has left it. A sale agreed, an invoice sent, a bill received and a profit reported are all real, and none of them has moved any money yet.
Follow one purchase from start to finish and exactly two payments happen: the business pays its supplier, and later its customer pays the business. Everything else — the stock arriving, the sale being agreed, the invoice being sent — moves no money at all. So the cash cycle is a count of the days between those two payments:
$$\text{days tied up} = \text{day the customer pays} - \text{day the supplier is paid}$$
and the day the customer pays is the day of the sale plus the customer's terms. Three things set the length: how long the stock waits to be sold, how long the customer takes to pay, and, off the front, how long the supplier waits to be paid.
For every one of those days the money is neither in the account nor spent for good. It is out working, and a business with more of its money out working than in the account is the business that cannot pay a bill on Friday.
Another way: steps
Another way: table
Three purchases, each counted from the day the goods arrive.
| Purchase | Supplier paid | Sold | Customer takes | Cash back | Days tied up |
|---|---|---|---|---|---|
| Café milk, sold at the counter | day 0 | day 4 | 0 days | day 4 | 4 |
| Repair parts for an account customer | day 14 | day 6 | 40 days | day 46 | 32 |
| Phone cases, supplier on 30 days | day 30 | day 12 | 0 days | day 12 | −18 |
The last one is below zero. The cases sold and were paid for before the supplier had to be paid, so for eighteen days the shop traded on its supplier's money rather than its own. That is the best position a cycle can be in, and it only happens when stock sells fast and customers pay at the register.
Put day 0 where the stock arrives. Any day would do, but the arrival is the one date everyone agrees on, and every other date is counted from it.
Find when cash leaves. Read the supplier's terms. Paid on delivery means day 0; thirty days' credit means day 30. A deposit paid on ordering is cash leaving before day 0, and counts as a day below zero.
Find when cash comes back. A sale at the register comes back on the day of the sale. A sale on an invoice comes back on the day of the sale plus the customer's terms — and, in practice, plus however late the customer is. Use the day they actually pay if you know it.
Subtract. The day back less the day out. A positive answer is days the business's own cash is out; a negative one is days it holds the supplier's money.
Look for the biggest lever. Count how many days each possible change moves one of the two payments. The largest count is the change that frees the most cash for the longest.
Check the answer by drawing the two payments on a line: the arrow from the supplier's day to the customer's day should be as long as your count, and should point forward when the answer is positive and backward when it is negative.
A purchase with a fat margin and a long cycle can drain an account that a thin, fast one never touches. Long Row Gardens spends in March on seed that is sold in May to restaurants who pay in June: every dollar of that seed is out for three months, however profitable the salad turns out to be. Corner Bean's coffee is bought, sold and paid for across the counter within a few weeks.
So when a business is short of cash, the useful question is rarely are we making money? It is which end of the cycle can move? Pay the supplier later, sell the stock sooner, or get the customer to pay sooner. A higher price improves profit and moves none of the three.
The size of the purchase matters too. Thirty days tied up on 200 dollars of milk is nothing; thirty days on 6,000 dollars of screens for a corporate client is a month's rent. Later lessons multiply the days by the money, which is what the account actually feels.
The start is set by the supplier's terms, which are often negotiable once a business has paid reliably for a few months. Asking for thirty days instead of payment on delivery moves the start by a month at no cost.
The middle is set by how long stock waits. Buying in smaller, more frequent batches keeps less on the shelf; a garden's growing season cannot be shortened at all, and a garden plans its cash around that.
The end is set by the customer. Walk-in customers pay at once; account customers pay on their terms, and some pay late. A deposit on large orders brings part of the end forward to before the work starts, which is why tradespeople and caterers ask for one.
Each of these is a conversation with a real person — a supplier, a customer — and the arithmetic tells you which conversation is worth having first.
Keep a note of the real days as well as the agreed ones. A customer on thirty days who always pays on day forty-five has a forty-five-day end, whatever the invoice says, and a supplier who never chases until day forty is, in practice, giving forty. The cycle that empties the account is the one made of the days that actually happen, so measure those, and plan with them rather than with the terms printed on the paperwork.
A small print shop wins an order for 2,000 brochures from a large company. The paper and ink cost 1,800 dollars, and the paper merchant allows the shop fourteen days. Printing, folding and delivery take nine days. The company's terms are sixty days from invoice, and large companies often pay a week or two late.
The shop owner counts the cycle before saying yes. Cash leaves on day 14. It comes back on day 9 + 60 = 69 at the earliest, and more likely around day 80. So the 1,800 is out for 69 − 14 = 55 days, and probably 66.
The account holds 3,000 dollars, and the rent of 1,200 falls due on day 20. With 1,800 out from day 14, only 1,200 is left on day 20 — exactly the rent, with nothing for anything else until the company pays.
She has three levers. The paper merchant offers thirty days to customers who have paid on time for six months, which she has: that moves the start to day 30 and shortens the cycle by sixteen days. She asks the company for a 30 percent deposit on order, which brings 540 dollars back on day 0. And she invoices on the day of delivery rather than at the end of the month, which stops a common two-week slip at her own end.
The order is just as profitable either way. What the levers change is whether she can pay the rent while she waits for it.
Large supermarkets sell most of their stock within days, paid at the register, and pay their suppliers on thirty to sixty days' terms. Their cash cycle is deeply negative: they hold weeks of their suppliers' money at any moment. That is part of how they fund new stores, and it is why a supplier to a supermarket usually has the opposite problem — a long, positive cycle — and needs a buffer or a loan to carry it.
The sale is the cash. A sale on an invoice is a promise to pay, and it arrives on the day the customer pays, not the day they agree.
Count from the day the stock arrives. Cash leaves when the supplier is paid. Counting from delivery charges the business for days that were really its supplier's money.
A good margin fixes a long cycle. Margin decides how much comes back; the cycle decides when. A business can be short of cash on every profitable order.
A cycle cannot be negative. It can, when customers pay before the supplier must be paid — and that is the position to aim for, not an error in the arithmetic.
The terms are the days. The days that matter are the ones on which money actually moves; a customer who pays late lengthens the cycle whatever the invoice said.
Put day 0 where the screens arrive.
$\text{day } 0$
Every other date is counted from delivery.
Find the day cash leaves: the supplier allows 21 days.
$\text{day } 21$
Cash leaves when the supplier is paid, not on delivery.
Find the day cash comes back: repaired on day 5, clinic pays in 45.
$5 + 45 = 50$
The job day plus the customer's terms.
Subtract the day it left.
$50 - 21 = 29$
Twenty-nine days of Dan's own money out.
Check against counting from delivery.
$50 - 0 = 50; \quad 50 - 29 = 21$
Counting from delivery overstates it by exactly the supplier's 21 days.
Put day 0 where the seed arrives, on the first of March.
$\text{day } 0$
The start of the count.
Find the day cash leaves: paid on delivery.
$\text{day } 0$
No supplier credit at the seed merchant.
Find the day the salad is sold: about ten weeks of growing.
$10 \times 7 = 70$
Stock that grows cannot be sold sooner.
Add the restaurant's thirty days.
$70 + 30 = 100$
The day cash comes back.
Subtract the day it left.
$100 - 0 = 100$
A hundred days: over three months of Tomasz's money in the ground.
Find the effect of thirty days' credit at the seed merchant.
$100 - 30 = 70$
Moving the start is the only lever the growing season leaves him.
Put day 0 where the cups arrive.
$\text{day } 0$
The start of the count.
Find the day cash leaves: the supplier allows 30 days.
$\text{day } 30$
Alexa pays at the end of the credit.
Find the day the last cup is sold.
$\text{day } 12$
A busy café uses a box of cups in under two weeks.
Add the customer's days: paid at the counter.
$12 + 0 = 12$
Counter sales come back on the day of the sale.
Subtract the day it left.
$12 - 30 = -18$
The cash came back before it left.
Read the negative cycle.
$18 \text{ days on the supplier's money}$
For eighteen days the café holds money it has not yet paid for.
Say what would spoil it.
$\text{paying on delivery} \Rightarrow 12 - 0 = 12$
Giving up the credit turns eighteen days ahead into twelve days out.
Find the day cash leaves.
$\text{day } 0$
The supplier is paid on delivery.
Find the day it comes back.
$\text{day } 25$
The last bag is paid for at the counter.
Subtract the day it left.
Corner Bean spends $420$ dollars on a month's coffee beans from the roaster. Counting from the day the stock arrives as day $0$, the supplier is paid on day $0$, the stock is sold on day $20$, and the customer pays $0$ days after that. Fill in the day the cash leaves, the day it comes back and the days it is tied up. If the customer pays before the supplier is paid, the days tied up come out below zero; write them with a minus sign.
| Day or days | |
|---|---|
| Day the supplier is paid and cash leaves | |
| Day the stock is sold | 20 |
| Days the customer takes to pay | 0 |
| Day the customer's cash comes back | |
| Days the cash is tied up |
Complete the worked solution: stock arrives on day $0$ and its supplier is paid on day $13$. It is sold on day $8$ to a customer who pays $42$ days later. How long is the cash tied up, and how long would it be if the customer paid $5$ days sooner?
Find the day cash leaves.
$\text{the supplier is paid on day } 13$
Delivery moves no money; the payment does.
Find the day cash comes back.
$8 + 42 =$ b
The sale day plus the customer's days.
Subtract the day it left.
$(\text{day back}) - 13 =$ g
The days the business's own cash is out.
Say what counting from delivery would get wrong.
$\text{it would add the supplier's } 13 \text{ days}$
Those days were the supplier's money, not the business's.
Take off the days the customer would save.
$(\text{days tied up}) - 5 =$ n
Moving the end of the cycle shortens it day for day.
Fixit Mobile buys batteries for a courier company's phones. Dan's parts supplier gives him $17$ days to pay. The batteries are fitted on day $4$ after they arrive, and the courier company pays its invoice $32$ days after the job. For how many days is Dan's own cash tied up in the batteries?
Answer:
Long Row Gardens spends $294$ dollars on seed and compost. Some of what it grows is sold for cash at the market stall and some to restaurants on thirty-day invoices. Draw every way the money changes form on its way round, and none that does not happen.
This task has no paper form; do it on a device.
Corner Bean takes a catering order from Harbor Office. The ingredients arrive on day $0$; the sandwiches are delivered with an invoice on day $1$; Alexa pays the ingredient supplier on day $9$; Harbor Office pays on day $44$. Put the four events in the order they happen.
Number the steps in order (write the number in the box):
Fixit Mobile buys phone cases from a supplier who allows $24$ days to pay. A batch of cases sells out at the counter by day $13$, paid for at the register. For how many days does Dan hold the supplier's money before he has to pay for the cases?
Answer:
A furniture restorer buys old chairs, restores them and sells most of them to an interior designer who pays $35$ days after delivery. Four changes are on the table: the designer paying in $18$ days instead of $35$; the chair sellers accepting payment $4$ days after collection instead of on the day; each restoration finished $3$ days sooner; and a price a tenth higher. Fill in how many days each shortens the cycle.
| Amount | |
|---|---|
| Days saved by the designer's new terms | |
| Days saved by paying the sellers later | |
| Days saved by finishing sooner | |
| Days saved by the higher price |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
Two purchases, each counted from the day its stock arrives. First, at Corner Bean, a month's coffee beans from the roaster: supplier paid on day $0$, sold on day $20$, customer pays $0$ days later. Second, at Fixit Mobile, a box of twenty replacement screens: supplier paid on day $30$, sold on day $25$, customer pays $0$ days later. How many days longer is the cash tied up in the first purchase than in the second?
Answer:
You can put the two payments of a purchase on their days and count the days between them, including a count below zero. Tell someone why a sale on an invoice is not cash yet, and why a higher price does not shorten the cycle. Next: the room a business has to pay its bills before the cash comes back.
14. Your turn: beans paid for on delivery, sold over 25 days at the register, step 3
$25 - 0 = 25$
Twenty-five days tied up.