Every business runs a loop: cash goes out (beans, cups, wages), sits in inventory, becomes a sale, and — eventually — comes back as cash. The days that loop takes is your cash conversion cycle.
A coffee shop’s loop is days. A contractor’s can be six months. Same profit margin, completely different cash needs — which is why "profitable" businesses still borrow to survive growth.
Shorten any of the three levers — hold less stock, collect faster, negotiate longer supplier terms — and you free cash without selling one riyal more.
The coffee shop version
You buy beans on Monday and pay the roaster cash. You sell the coffee on Wednesday and the customer pays immediately. Two days between money out and money in. Your cash conversion cycle is two days, which is why coffee shops rarely fail on working capital — they fail on rent.
Now change one thing. The roaster gives you thirty days. You buy Monday, pay in thirty days, sell Wednesday. Your cycle is negative twenty-eight days. You are holding the customer's cash for four weeks before paying for what you sold. That is the supermarket model, and it is why supermarkets can expand on their suppliers' money.
Now make it a trading company
Same arithmetic, different numbers. You hold stock for sixty days before it sells. Customers take fifty days to pay. Suppliers give you thirty.
Sixty plus fifty minus thirty is eighty days. Every riyal of sales ties up cash for roughly eighty days before it comes back. Grow twenty per cent and you need twenty per cent more working capital, permanently, before you see any of the profit.
This is the single most common reason a profitable Saudi SME runs out of money while growing. Nothing is wrong. The cycle is simply longer than the funding.
The three levers
Inventory days. Usually the biggest and the most ignored. Slow-moving stock is cash sitting on a shelf. Identify what has not moved in ninety days and decide whether to discount it — a discounted sale returns cash, a full-price item that never sells returns nothing.
Receivable days. Not the same as your terms. If terms are thirty and the number reads fifty, the gap is a collections process problem, not a pricing one. Invoice the day you deliver; most slippage starts there.
Payable days. The tempting lever and the dangerous one. Stretching suppliers improves the cycle until it costs you priority, price or supply. Negotiate terms openly rather than paying late quietly.
Do the calculation on your own numbers
Inventory days: inventory divided by cost of sales, times 365. Receivable days: receivables divided by revenue, times 365. Payable days: payables divided by cost of sales, times 365. Add the first two, subtract the third.
Then multiply your daily cost of sales by that number. That is roughly how much cash your operating cycle needs at all times — the figure that has to be funded before you take on more volume.
Why this matters more than profit
A business with a thin margin and a short cycle survives comfortably. A business with a healthy margin and an eighty-day cycle can fail while profitable, because the profit arrives after the payroll.
Key points
- The cycle is inventory days plus receivable days minus payable days
- A negative cycle means customers fund your operations
- Growth multiplies the cash your cycle already consumes
- Inventory is usually the largest and least examined lever
- Stretching payables buys days and costs goodwill
Practical checklist
- Calculate all three components on your own figures
- Multiply daily cost of sales by the cycle to size the funding need
- List stock with no movement in ninety days
- Compare receivable days to your stated terms
- Invoice on the day of delivery, not at month end
- Renegotiate supplier terms openly rather than paying late
- Re-run the calculation before committing to growth
