Expense to Profit Conversion Cycle


Mo’s Widgets –  Expense to Profit Conversion Cycle




“It takes me HOW long to turn an expense into a profit???


Mo’s inventory average is $75,000

Mo’s has to pay his suppliers in 30 days when he buys.

Mo sells to his customers and it takes them 60 days to pay MO.


Annual Revenue                      $500,000


Cost of Goods (60%)              $300,000


Operating Expenses                $110,000


Profit for Mo                          $  90,000


Mo’s Cash Conversion Cycle


Mo buys a widget for $300 that he will sell for $500. Gross profit $200, nice!


June 1 – Mo buys the widget.


July 1  – Mo pays his supplier $300.


June, July, August –  the widget sits in Mo’s warehouse (remember his average inventory is $75,000 and his annual cost of goods is $300,000 ….$300,000/$75,000 = 4 …which is how many times per year Mo turns his inventory. 4 times per year is once every 3 months)


September 1 –  Mo sells the widget to Jack’s Stuff, Inc.


November 1 –  Jack pays Mo for the widget.


Mo’s cash conversion is 120 days. Mo paid for the widget on July 1 and Mo got paid by Jack on November 1.


Question- Who pays Mo’s employees, rent, phones, etc. during this period?


Answer – Mo’s working capital, which he better have enough of or Mo will be out of business.