Most business owners look at working capital when their accountant sends quarterly financials. By then, a cash crunch that started in February shows up in April reports—and you've already been scrambling for two months without knowing why.
Working capital problems don't announce themselves. They compound quietly. A customer stretches payment terms from 30 to 45 days. Your best supplier tightens theirs from 30 to 15. Inventory sits a little longer. None of these feel urgent in isolation. Together, they drain $200K from your operating cash in 90 days.
Monthly tracking catches these shifts while you can still do something about them.
The four ratios that actually matter
Forget the textbook list of 15 liquidity metrics. For an operating business doing $5M-$50M in revenue, four ratios tell you almost everything:
Days Sales Outstanding (DSO): How long it takes customers to pay you. Calculate it as (Accounts Receivable ÷ Revenue) × Days in Period. If your DSO moves from 35 to 42 days over three months, that's real money stuck in transit. On $500K monthly revenue, that 7-day shift ties up an extra $117K.
Days Payable Outstanding (DPO): How long you take to pay suppliers. Same formula, swap in Accounts Payable and Cost of Goods Sold. This is your free float—extending it (within terms) improves cash position. Shortening it does the opposite.
Days Inventory Outstanding (DIO): How long inventory sits before you sell it. Inventory ÷ COGS × Days in Period. For manufacturers and distributors, this is often where cash goes to hide. A construction materials supplier I worked with had $800K in "good inventory" that hadn't moved in 6 months. That's not inventory—that's a pile of cash earning zero.
Cash Conversion Cycle (CCC): DSO + DIO - DPO. This single number shows how many days your cash is tied up in operations. A CCC of 45 means every dollar you spend takes 45 days to cycle back as cash. If that number creeps from 45 to 60 without revenue growth to match, you're funding an extra 15 days of operations from somewhere.
What the trends tell you
The absolute numbers matter less than the direction. A construction company with DSO of 50 days might be fine—that's the industry. But if it was 42 days six months ago and has risen steadily each month, something changed. Maybe a key customer is struggling. Maybe your invoicing process slipped. Maybe you took on work with longer payment terms than your cost structure supports.
Monthly tracking gives you six data points in half a year instead of two. You see patterns, not snapshots.
Here's what I look for:
- DSO rising while revenue flat: Collection problem or customer quality problem
- DIO rising while sales flat: Purchasing too much or selling too slow
- DPO falling: Suppliers tightening terms, often a sign they see risk you don't
- CCC rising faster than revenue: Growth is eating cash, not generating it
How to actually do this
Pull these numbers on the same day each month. I use the 10th—far enough from month-end for books to be clean, close enough to act on what you find.
Build a simple spreadsheet that trends each ratio over 12 months. You're looking for sustained movement, not one-month blips. Two months in the same direction is a signal. Three months is a pattern that needs a response.
Set thresholds that trigger action. For most businesses: any ratio moving more than 10% from your 12-month average deserves investigation. You might find a reasonable explanation. You might catch a problem before it becomes a crisis.
Where to start
Pull your last six months of financial statements and calculate these four ratios for each month. Plot them. If you see a trend you can't explain—especially in CCC—figure out which component is driving it before next month's numbers come in.
If you're not sure what the numbers are telling you, or you want help building a monthly tracking system that fits your business, that's the kind of work we do at Laverton Advisory.
Derek Hammock is a CPA and fractional CFO at Laverton Advisory. He works with founder-led businesses to build the financial clarity they need to make better decisions.