Cash conversion cycle
The cash conversion cycle measures the time between spending to acquire and deliver, and collecting the cash that results.
In a subscription business the cycle is shaped by commercial terms that sales controls: billing frequency, payment terms, and whether the contract is prepaid or in arrears. A monthly-billed annual contract and a prepaid annual contract are identical in ARR and completely different in cash.
This is the clearest case for treating finance as a control system over commercial design. Payment-term concessions are typically granted as small closing gestures, and they modify the company’s working capital position in ways that no pipeline metric surfaces.
Where it breaks
Net-90 terms are granted routinely at quarter end, and the resulting cash gap is discovered by treasury.
Related terms
- Deferred revenue
- Deferred revenue is a liability representing cash collected or invoiced for obligations not yet satisfied.
- Unit economics
- Unit economics is the per-unit relationship between what it costs to acquire and serve a customer and what that customer returns over their lifetime.
- Deal desk
- A deal desk is the control point where non-standard commercial terms are reviewed, approved and recorded before they become contractual obligations.
- Bookings
- A booking is the contractual commitment a customer has made, distinct from billings, which is what has been invoiced, and from revenue, which is what has been earned.
Field notes on this
- Four clocks: bookings, billings, revenue, and cash
Commercial commitment, invoicing, recognition, and collection answer different questions. Reconcile the clocks without treating them as one metric.