Inventory and cash flow pull in opposite directions. Money leaves the day you pay a supplier and comes back only when a customer pays for the goods. The days in between are your cash conversion cycle, and shortening it frees cash without borrowing a shilling.
A shop can make a profit and still run short of cash, because stock it hasn't sold is already paid for. This guide works the cycle for one Kampala wholesaler in Ugandan shillings. It prices each day, then ranks the changes that free the most cash.
Why profit isn't cash when your stock grows
Profit counts a sale when you make it; cash counts the money when it arrives. Stock you bought and haven't sold sits on the balance sheet, paid for, and adds nothing to profit until it sells.
So the cash flow statement takes a rise in stock off profit to show the cash that operations brought in. Paragraph 7.8 of IFRS for SMEs lists changes in inventories, receivables and payables as the first adjustments (IFRS Foundation, Module 7).
For example, a hardware wholesaler in Kampala makes a profit of UGX 60,000,000 in a year. Over the same year its stock at cost grows from UGX 130,000,000 to UGX 162,000,000. The figures are illustrative.
| Line | UGX |
|---|---|
| Profit for the year | 60,000,000 |
| Stock grew, from 130,000,000 to 162,000,000 | −32,000,000 |
| Customers owe more, from 27,500,000 to 32,500,000 | −5,000,000 |
| The wholesaler owes suppliers more, from 27,000,000 to 29,000,000 | +2,000,000 |
| Cash from operations | 25,000,000 |
More than half the year's profit went back onto the shelves. The owner reads UGX 60 million of profit, but operations brought in UGX 25 million of cash.
The cash conversion cycle, worked
The cash conversion cycle is the number of days between paying for stock and collecting the cash from selling it. The Corporate Finance Institute writes the cash conversion cycle as DIO + DSO − DPO.
- DIO, days inventory outstanding: how long stock sits before it sells. Average stock ÷ cost of goods sold × 365. Days inventory outstanding works it through four ways.
- DSO, days sales outstanding: how long credit customers take to pay. Average receivables ÷ credit sales × 365.
- DPO, days payable outstanding: how long you take to pay suppliers. Average payables ÷ cost of goods sold × 365.
For example, the Kampala wholesaler's cost of goods sold is UGX 730,000,000 for the year. Its credit sales to contractors come to UGX 365,000,000. Each average below is the opening figure plus the closing one, divided by two.
| Part | Calculation | Days |
|---|---|---|
| DIO | Average stock 146,000,000 ÷ 730,000,000 × 365 | 73 |
| DSO | Average receivables 30,000,000 ÷ 365,000,000 × 365 | 30 |
| DPO | Average payables 28,000,000 ÷ 730,000,000 × 365 | 14 |
| Cash conversion cycle | 73 + 30 − 14 | 89 |
The wholesaler pays for goods 89 days, on average, before their cash comes back. Stock is the biggest part of the wait: 73 of the 89 days.
What one day is worth
Divide each yearly flow by 365 to price a day. A day of stock is worth UGX 2,000,000 of cost of goods sold, and a day of customer credit is worth UGX 1,000,000.
Uganda's banks charged an average of 17.32% a year on shilling loans in July 2026 (Ministry of Finance, Performance of the Economy). At that rate, each day of stock carried on an overdraft costs the wholesaler about UGX 346,400 a year in interest.
How much cash each change frees
Cutting a day from DIO or DSO, or adding one to DPO, frees one day's worth of cash for as long as the change lasts. The table prices three changes the wholesaler could make.
| Change | Days | Cash freed |
|---|---|---|
| Clear slow stock and order fast lines more often: DIO from 73 to 55 | −18 | 36,000,000 |
| Collect from contractors in 21 days, not 30: DSO from 30 to 21 | −9 | 9,000,000 |
| Agree 30-day terms with the main suppliers: DPO from 14 to 30 | +16 | 32,000,000 |
| All three: the cycle falls from 89 to 46 days | −43 | 77,000,000 |
At 17.32%, the UGX 36,000,000 from stock alone saves about UGX 6.2 million a year of interest if it pays down an overdraft. All three together save about UGX 13.3 million.
Stock is the lever the owner controls alone. Customers and suppliers must agree to new terms, while slow stock needs only a decision to clear it.
Longer supplier credit can cost more than it saves if you give up an early-payment discount for it. Inventory financing turns that discount into a yearly rate you can compare.
Eight ways to free cash from stock
Each of these lowers DIO, DSO or the stock you must pay for, without emptying the shelves customers use.
- Clear stock over 90 days old first. Cash now beats cash never, even at a small loss. See dead stock for how to find it and what to do with it.
- Order fast sellers smaller and more often when the supplier is close and reliable. Reorder quantity shows how to size each order.
- Stop reordering slow lines. Let them sell down before you buy again. Inventory turnover by product group shows which lines turn slowest.
- Move stock before you buy it. If one branch has too much of a line and another has none, transfer it instead of ordering more.
- Size safety stock to real lead times. A shop that imports through Mombasa or Dar es Salaam waits weeks for each order and must hold more. Review the buffer each quarter instead of padding every order; avoiding overstocking and stockouts covers the reorder point.
- Buy in bulk only with a plan. A bigger lot at a better price pays only if it sells before the saving is eaten by interest and storage.
- Give credit with a limit. Set how much each account customer may owe, and collect before you sell them more.
- Count every month. A regular inventory audit finds slow and missing stock while it is still small.
Cutting stock too far costs cash as well. An empty shelf loses the sale and the cash it would have brought in. Cut the slow lines and protect the fast ones.
How to track inventory and cash flow in ArmPOS
ArmPOS keeps the figures the cycle needs, so working it out each month is a short sum. Use these reports in this order.
- Stock at cost. Reports › Inventory Valuation multiplies each product's stock on hand by its Cost and totals it. Note the total at each month end (Stock reports).
- Opening stock, closing stock and purchases. The Analytics Report shows them for any period and warehouse, by purchase price (Sales reports).
- How long stock has sat. The Stock Aging Report sorts what you hold into up to 30, 30 to 60, 60 to 90 and over 90 days. The Dead Stock Report lists products that haven't moved in 30, 60 or 90 days.
- What customers owe. The Customers Report shows each customer's Total Sale Due (Customer and supplier reports). The POS checks a Credit Limit above 0 and refuses a sale that would take the customer's debt above it (Customers).
- What you owe suppliers. The Suppliers Report shows each supplier's Total Purchase Due, and a purchase can be paid in part (Pay your suppliers).
- Cash in and out. Reports › Cash Flow Report adds up Total Inflow, Total Outflow and Net Cash Flow for a period. Group by splits it by account, payment method or warehouse (Payments, cash flow and tax reports).
- Move slow stock to where it sells. A transfer moves stock between warehouses once someone with permission approves it (Move stock between warehouses).
The same reports work for a single shop in Uganda or several branches in Tanzania, one warehouse at a time or all together.
Frequently asked questions
Is buying inventory a cash outflow?
Yes. Paying a supplier for stock is an operating cash outflow. The stock then sits on the balance sheet as a current asset until it sells.
Does an increase in inventory increase or decrease cash flow?
It decreases it. The cash flow statement takes the rise in stock off profit, as the wholesaler's UGX 32 million was.
What is a good cash conversion cycle?
No single number fits every trade. Track yours each quarter and shorten it without emptying shelves. A cycle that lengthens while sales hold steady means stock or credit is piling up.
Can the cash conversion cycle be negative?
Yes. A shop that sells for cash quickly can pay its suppliers after the goods have sold. Its cycle is then negative, and its suppliers' credit pays for its stock.
Should I borrow to fix my cash flow?
Only for stock that will sell within the loan's term. Borrowing to hold slow stock adds interest to cash that is already stuck.
Work out your own cycle from last quarter's figures, then start with the stock that is over 90 days old. To see stock value, stock age, what customers owe and what you owe suppliers in one place, create a free ArmPOS account.
