The secret to success is... cash conversion cycles?

Hey there,

Somehow the year is almost over and we are only three weeks away from 2025.

As the year comes to a close, and I start preparing to set goals and intentions for the New Year, I like to spend a good amount of time reflecting on the previous year.

I’ve reflected on some of the big things I accomplished that I said I would:

• Complete an IRONMAN 70.3

• Spend a month in Europe

• Invest in my network & career

• Start this newsletter

But I’ve also realized there are some goals I set that weren’t so successful:

• Get lean

• Learn Portuguese

• Buy a house

As I reflect, one of the questions that I’ve asked myself has been “What made me succeed in some goals, yet fail in others?” 

They were all “big goals”, but there was something different about the ones that succeeded and the ones that didn’t:

Cash conversion cycles.

What is a Cash Conversion Cycle?

As a consumer, you probably don’t think about inventory outside of when you get annoyed your favorite item is out of stock, but as a growth strategist, I think about inventory a lot.

That’s because inventory is at the center of the cash conversion cycle.

As a business, unless you sell software or a service, you sell something tangible - shoes, clothes, gadgets, coffee, etc. To sell that thing, you need to have it, or at least have it readily available, but that isn’t always as easy as it sounds!

Let’s look at a recent online purchase of mine:

Nike Pegasus Running Shoes

As a consumer, the purchase starts here, on the Nike website. I check to see what shoe I want and if they have it in my size, and I order it. But for Nike, the process starts much earlier.

Nike needs to:

1. Design the shoe and determine how many they need in each size and color

2. Pay to make those shoes in advance

3. Pay to store those shoes in a warehouse

4. Wait for you to make a purchase

5. Ship that pair of shoes and, finally, actualize revenue.

That is the cash conversion cycle.

The cash conversion cycle, in its simplest form, is the time it takes from spending cash on the product you want to sell to make money, to it turning into profit.

Why Cash Conversion Cycles Matter?

It may seem insignificant, but how rapidly you can reinvest cash has a massive impact on growth, and brands know it.

Let’s look at that shop above, you can see the shoe above costs $140, but what about these two styles:

This one is $119

This one is $127

It’s the same shoe, it costs the same to make, so why the different prices?

Cash Conversion cycles.

Nike wants to turn their inventory back into cash as quickly as they can to turn a profit so they can reinvest into more products, advertising, and growth efforts.

That’s the power of compounding and faster conversion cycles.

Even if you make less, shortening the time between investment periods typically works out in the long run.

Two Issues Within Cash Conversion Cycles

The cash conversion cycle is a complex system that touches every part of an organization from finance, to marketing, to warehousing, to design and development.

But almost all problems boil down to two core problems:

1. Too much inventory

2. Not enough inventory

Too much inventory

When managing inventory, one of the worst things you can do is buy too much inventory.

Growth requires capital and where you choose to invest your capital can be the difference between winning and failing. If you tie up all of your funds in products that sit on a shelf, you don’t get more money to invest in the business for a long time.

This can stunt growth or even worse make it hard to pay bills.

Not enough inventory

Underinvesting in inventory means you have more cash on hand to pay bills, but you don’t have products to sell and not having products to sell means you aren’t making any money.

Sales and revenue generation is paramount to success. If you aren’t selling you’re dying.

The Ideal Cash Conversion Cycle

The ideal Cash Conversion Cycle is an “on-demand” model where the product is created and sold based on the order.

Some examples of this include dropshipping where you order a shirt with a design and then the supplier prints the product and sells it to you. Another example is expensive furniture.

Ever wonder why your new sofa takes 12 weeks to be delivered? It’s because they’re making it as part of your order. It would be a HUGE investment and risk for that company to build hundreds of sofas in advance.

Thinking in Cash Conversion Cycles

Buying a product to sell is a business concept, but our lives are filled with cash conversion cycles, especially if we replace “cash” with “investment.

We can apply it to our time, energy, thoughts, and intentions.

We get to the point that we start seeing everything as potential conversion cycles and there is magic in that.

Let’s look at the goals I had for 2024 and their associated “investment conversion cycles” The goals I achieved had very short conversion cycles where I experienced a positive return to be reinvested.

• Daily training wins lead to completing an Ironman 70.3.

• Weekly letters written lead to starting a newsletter.

• Monthly dinners and networking events led to more personal and professional growth.

On the other hand, the goals I didn’t complete had long conversion cycles.

• “Get Lean”

• “Learn Portuguese”

• “Buy a house”

I didn’t build these goals with short conversion cycles and as a result, I ran out of energy, gave up, or didn’t do enough to check the box.

Small wins & cash conversion cycles

What could I have done to improve the likelihood of achieving those goals? I could have created smaller wins with shorter conversion cycles.

Let’s use the “get lean” example.

“Get lean” is vague. Losing 15 pounds would have been a better goal, but it still would have had a long conversion cycle. Weighing less every Monday than the previous Monday would be an even better goal.

Despite ultimately trying to achieve the same thing, by shortening the conversion window with “small wins” I’d be able to build momentum and reinvest positive energy each week.

Whereas, in the first two scenarios, I’m forced to put in weeks or months of work all with the hope of some positive return.

It’s a recipe for burnout and quitting.

In business, it’s a recipe for running out of money and dying.

Implementing Personal Cash Conversion Cycles

If you’re like most people, you’re about to make some type of New Year’s Resolution(s).

My ask of you is to think about creating goals with short conversion cycles. Cycles that pay out in small wins and build momentum early on that can be re-invested into your goal.

If your goal is to save money this year, don’t set a yearly goal, set a weekly goal.

If your goal is to make more money, build habit goals rather than outcome goals.

If your goal is to lose weight, set weekly or daily wins that build to bigger goals.

Whatever your goal… find ways to optimize towards smaller payouts.

When you do, you start with smaller goals, but those smaller goals are stacked on top of each other to build sustainable, long-term habits that make it impossible to not achieve everything you want to achieve.

Leverage the power of compounding with short investment conversion cycles.