This page is for a factory owner, a domestic brand owner, or a finance clerk who wants to see both sides of a single payment term at once. At work, lesson T15-C04-L02 calculated Delta Garments' own cash conversion cycle as the party being paid. This lesson mainly teaches the money flow: it shows that the same 60-day open account that lengthens Delta Garments' own cash conversion cycle as a seller can shorten Cedar & Co.'s own cash conversion cycle as a buyer, because days payable outstanding and days sales outstanding sit on opposite sides of the same formula.
Cedar & Co. is a domestic, Make to Stock brand with 12 of its own shops, buying from Delta Garments on a fixed 60-day open account and selling directly to its own retail customers. Without this skill, a merchandiser might assume a payment term is simply good or bad in general, missing that the very same term is a cost to the party waiting to be paid and a benefit to the party doing the paying.
You need: working capital from lesson T15-C04-L01, and the cash conversion cycle formula from lesson T15-C04-L02.
By the end of this lesson you can:
Not covered here: building a complete working capital sheet from a blank row (lesson T15-C04-L05).
| Term | Meaning |
|---|---|
| Working capital | The money a business needs on hand to keep operating while it waits to be paid for goods already made. |
| Open account | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Payment terms | The part of a purchase order stating when and how the factory is paid, for example letter of credit at shipment or open account. |
| Cash-flow gap | The length of time between a factory finishing production and actually receiving payment for that production. |
| Letter of credit | A bank promise to pay the factory once the shipping documents match the order. |
A payment term fixes one date: when the buyer pays the seller. That single date feeds two different formulas at once. For the seller, the days between shipment and payment are its own days sales outstanding, a term that is added, so a longer wait lengthens the seller's own cash conversion cycle. For the buyer, those same days are its own days payable outstanding, a term that is subtracted, so a longer wait shortens the buyer's own cash conversion cycle. One agreed date, two opposite effects, because each business is looking at the same gap from a different side of its own formula.
| What can differ | The shapes you will meet | Why it matters |
|---|---|---|
| Delta Garments as the seller | Selling an equivalent-value order to Cedar & Co. on 60-day open account, Delta Garments' own days sales outstanding rises to 60 days, illustratively, instead of the 5 days a letter of credit gives it. | Delta Garments' own cash conversion cycle lengthens from 45 to 100 days (70 + 60 - 30), tying up far more of its own cash for the same order value. |
| Cedar & Co. as the buyer | Buying from Delta Garments on the same 60-day open account, Cedar & Co.'s own days payable outstanding is 60 days, a term that is subtracted in its own formula. | A longer days payable outstanding shortens Cedar & Co.'s own cash conversion cycle, the opposite direction from Delta Garments' own experience of the same term. |
| Cedar & Co.'s own retail side | Cedar & Co. sells directly to shoppers in its own 12 shops, mostly for cash or card at the point of sale, giving it an illustratively short days sales outstanding of about 2 days. | A short days sales outstanding on the retail side, combined with a long days payable outstanding on the supplier side, can push a retailer's own cash conversion cycle below zero. |
| A Make to Stock brand's own inventory | Cedar & Co. holds finished retail stock across its 12 shops ahead of confirmed sales, from its own forecast, giving it an illustratively longer days inventory outstanding of about 45 days. | Even with a short days sales outstanding, a Make to Stock brand's own inventory holding still adds real days to its own cash conversion cycle. |
Cedar & Co. buys an equivalent-value order from Delta Garments on 60-day open account, then holds the finished stock across its own 12 shops for about 45 days before it sells, illustratively, and collects cash from its own retail customers in about 2 days on average, since most retail sales are settled immediately. Its own days payable outstanding to Delta Garments is 60 days, since that is the term it takes to pay for the goods it already has in its own shops.
| Day-count | Cedar & Co.'s own illustrative value | What it measures |
|---|---|---|
| Days inventory outstanding | 45 days | How long finished stock sits across Cedar & Co.'s own 12 shops before it sells |
| Days sales outstanding | 2 days | How long after a retail sale Cedar & Co. actually holds the cash |
| Days payable outstanding | 60 days | How long Cedar & Co. itself takes to pay Delta Garments for the goods |
A common mistake is describing a 60-day open account simply as "a slow payment term," as though it were bad news for everyone. It is a real cost for Delta Garments, whose own cash conversion cycle lengthens to 100 days because of it. It is a real benefit for Cedar & Co., whose own cash conversion cycle falls to -13 days partly because of the same term. A merchandiser negotiating on behalf of either side needs to know which side's cash conversion cycle they are trying to protect, since the same clause in the same purchase order helps one party and costs the other at the same time.
The same payment term affects two businesses in opposite ways. For the business waiting to be paid, a longer wait is added to its own cash conversion cycle, making it longer. For the business doing the paying, that same wait is subtracted from its own cash conversion cycle, making it shorter. Delta Garments, selling to Cedar & Co. on 60-day open account, waits longer and its own cash cycle stretches to 100 days. Cedar & Co., buying on the same term but selling quickly for cash in its own shops, ends up with a cash conversion cycle below zero, meaning its own suppliers effectively finance part of its business. Neither business is right or wrong to feel differently about the same clause; they are simply looking at the same gap from opposite sides.
Delta Garments approaches Omar, the owner of Cedar & Co., asking to shorten their 60-day open account to 30 days, citing its own tightening cash conversion cycle on the domestic side of its business. Omar's own finance team calculates what this would do to Cedar & Co.'s own cash conversion cycle before responding.
Here is the note Omar's team prepared:
Should Omar agree to shorten the open account term to 30 days without asking for anything in return? Decide before opening the answer.
Not without addressing the cost to Cedar & Co.'s own cash conversion cycle. Two facts in Omar's own team's note decide this.
First, the size of the swing. Shortening the term from 60 to 30 days moves Cedar & Co.'s own cash conversion cycle from -13 days to 17 days, a 30-day swing that changes it from a business partly financed by its supplier to one that must fund its own cash gap.
Second, whose problem is being solved. The request addresses Delta Garments' own cash conversion cycle, not Cedar & Co.'s. Agreeing without discussion moves the entire cost from one business to the other rather than sharing it.
The right response is not a flat refusal, since Delta Garments' own cash pressure is real, but a negotiation: perhaps a partial change, to 45 days, splitting the swing, or a small price concession from Delta Garments in exchange for Cedar & Co. accepting the shorter term.
Using Cedar & Co.'s own illustrative day-counts from the workplace scenario:
A 30-day swing means Cedar & Co. would need to find its own cash to cover 30 more days of its own operations than before, across every order it buys from Delta Garments on the new term. For a business running several orders a year at Order A's own USD 48,000 scale, that swing represents a real, recurring increase in Cedar & Co.'s own working capital need, not a one-time cost.
Open the course workbook's "Cash conversion cycle" sheet twice in your own analysis: once with Delta Garments' own day-counts as the seller, and once with Cedar & Co.'s own day-counts as the buyer, using the same 60-day term in opposite roles, days sales outstanding for one, days payable outstanding for the other. Compare the two results before agreeing to change any payment term.
[Download the Working capital and cash cycle sheet](../../templates/T15-C04-working-capital-and-cash-cycle-sheet.xlsx)
1. Why does the same 60-day open account lengthen Delta Garments' own cash conversion cycle but shorten Cedar & Co.'s own cash conversion cycle?
2. Cedar & Co.'s own days inventory outstanding is 45 days, days sales outstanding is 2 days, and days payable outstanding is 60 days. What is its own cash conversion cycle?
3. A supplier asks a retailer to shorten its own open account term from 45 days to 20 days. What happens to the retailer's own cash conversion cycle, all else unchanged?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Working capital | رأس المال العامل | Fonds de roulement | İşletme sermayesi | The money a business needs on hand to keep operating while it waits to be paid for goods already made. |
| Open account | حساب مفتوح | Compte ouvert | Açık hesap | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
| Payment terms | شروط الدفع | Conditions de paiement | Ödeme şartları | The part of a purchase order stating when and how the factory is paid, for example letter of credit at shipment or open account. |
| Cash-flow gap | فجوة التدفق النقدي | Écart de trésorerie | Nakit akışı açığı | The length of time between a factory finishing production and actually receiving payment for that production. |
| Letter of credit | اعتماد مستندي | Lettre de crédit | Akreditif | A bank promise to pay the factory once the shipping documents match the order. |
You now know how the same payment term can lengthen one business's cash cycle while shortening another's. The final lesson brings everything from this course together into one complete working capital and cash cycle sheet. Back to the course map