• Learn why you should be more focused on Capital Velocity than budget variance
• Calculate your Cash Conversion Cycle and Capital Turns
• Become more profitable by cycling your dollars faster
I've read a lot about cost cutting recently in the financial press, but far less than I rightfully should have about capital velocity.
Think of two fruit sellers at the same market, each starting the week with $100 of capital.
Seller A buys premium produce at $10 a kilo and sells it at $15. Great margin. But it takes her all week to sell through her stock. At the end of the week, she's made $150 in revenue and $50 in profit. One turn of her capital.
Seller B buys everyday produce at $4 a kilo and sells it at $5. Tiny margin. But he sells out every day and reinvests the same $100 each morning. He pockets $25 a day, seven days in a row. At the end of the week, he's made $175 in profit.
Same starting capital, yet three and a half times the profit.
By cycling your dollars faster through your business, you're able to grow your profitability without making any other changes to your business.
This means that a product business turning inventory eight times per year often outperforms one turning it three times, even with lower margins.
That's capital velocity.
Why profitable businesses can fail by not measuring their Cash Conversion Cycle
There are plenty of profitable businesses that fail because their cash is moving too slowly.
That's why I make sure all my CFOs are measuring Capital Velocity.
The simplest way to see Capital Velocity is through your Cash Conversion Cycle (CCC).
Quick Calculation to figure out your Capital Turns (per year)
Step 1: Calculate your Cash Conversion Cycle (CCC)
Inventory Days + Receivable Days − Payable Days = CCC
Example:
• Inventory: 60 days
• Receivables: 45 days
• Payables: 30 days
So: 60 + 45 - 30 = 75
CCC = 75 days
Step 2: Convert to Capital Turns (CT)
Capital Turns = 365 (days) ÷ CCC
So: 365 ÷ 75 = 4.9365
CT = 4.9365
In this example, the same dollar moves through the business just under five times per year.
If you moved that number from five turns to six, you would effectively generate the same revenue, with less capital tied up in operations.
If every organisation actively managed capital velocity:
• fewer profitable companies would run out of cash
• growth would require less funding
• efficiency programs would look very different
• cost cutting would be a last resort.
Most senior leaders understand its importance in theory, but the number of organisations facing a cash-flow crisis suggests many are not actively managing it.
Whether you're growing your fruit stall or scaling a national logistics operation, there are literally hundreds of low-effort, high-impact ways to improve capital velocity, and therefore increase profit.
So my question to you is this: Is it time you took a closer look at your capital velocity?
I'd love to hear your thoughts.
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