You’ve been sold a lie.
But it’s not your fault.
For years, the myth of a “negative” cash conversion cycle has dominated the ecommerce industry.
Today, let’s demolish the bull s***.
📊 Drew Fallon shows you how CCC really works + dashboard
🤑 Sean Frank pulls back the curtain on a seven-figure secret
🏆 Top five headlines from this week in consumer (DTC) news
Oh, and at the very end, updates on last week’s outlandishly epic response to Sean’s private-equity revelation …
Signed In, Personalized Shopping Made Us +$1.5m During Our Anniversary Sale
In March, we run Ridge’s anniversary sale.
Sitewide discounts on different products, and existing customers get an extra 10% off.
Good deal. But we could not tell who was already a customer.
Last year, we showed everyone the same offer onsite. And sent personal codes for the extra 10% they had to paste.
Not great.
We wanted it to be better. More personalized. Easier for returning customers to take the offer.
This year, we used Rivo.
It recognizes when someone has bought from us before.
It changes the messaging on our site so they can have a signed-in shopping experience before they sign in.
For the anniversary sale, it also applied a custom discount code based on the customer’s profile.
No copy and pasting. No pissing off new shoppers complaining about how they were missing out.
No bullshit.
10k repeat purchases we could track from the custom codes. Seven figures in additional revenue.
I am bullish on signed-in shopping.
I like Rivo. I like Stuart. He runs it. I literally drove Stuart to Grow LA when they were giving away Ridge swag.
We are on the demo page. So is HexClad.
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Drew Fallon
Founder, Iris Finance
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The Myth of Negative Cash Conversion Cycle and 3 Capital Efficiency Metrics
I’ve seen it. You’ve seen it. We’ve all seen it.
NegAtiVe CCC wITh THiS cReDiT cArD
gYmShark sCaleD to $1B b/c nEgAtiVe
This is the article to end all discussions on negative cash conversion cycles (CCC).
Let’s finally kill this dangerous myth causing founders to optimize for the wrong things.
What Is Cash Conversion Cycle?
CCC is simply a measure of how fast you turn inventory into cash. If it’s negative, you are generating money BEFORE you actually pay for inventory.
The formula breaks down like this:
CCC = DIO + DSO - DPO
- DIO (Days Inventory Outstanding)
How long you have to hold inventory before selling it
- DSO (Days Sales Outstanding)
How long it takes you to get paid by your customers
- DPO (Days Payable Outstanding)
How long you have to pay suppliers after receiving
For ecommerce brands, DSO is often zero because customers pay immediately — depending on your processor terms.
CCC mostly comes down to how quickly you turn inventory (DIO) versus how long you can delay paying suppliers (DPO).
Why Is Ecommerce Obsessed?
A few years ago, there was a viral story about how Gymshark used negative CCC to scale. Then a bunch of vendors started using it as a marketing tactic (read: SCAM).
The pitch goes something like this …
Achieve negative CCC, scale infinitely, never worry about cash flow or raising capital again.
Sound too good to be true? It is.
The reason I hate this “one simple trick” nonsense is that it’s a false optimization. You get suckered into thinking a business model works when it doesn’t.
And you end up stuck on the growth treadmill, willing to pay any CAC to keep the cash flowing.
The Math Behind the Myth
Let’s look at a business with –10% net margins, a –60-day CCC, and growing revenue 20% month-over-month.
To help illustrate, we’ve made a Google Sheet and an interactive dashboard you can “remix” yourself using Claude.
At first glance, the charts look amazing.
Revenue climbs steadily from $100k in Jan to $743k by Dec, and cash balance grows from $300k to over $880k. Yes, even with NEGATIVE margins!
Miraculous, right?
The math works because when you’re growing extremely fast, your DIO is artificially low. That low DIO is the dominant component of your CCC calculation.
Plus, because you don’t have to pay suppliers for two months after receiving product (thanks to your net terms), you’re essentially using new-customer money to fund operations.
Here’s the thing …
This model only works if you NEVER STOP GROWING.
What Happens When Growth Slows?
We just looked at continuous growth. Up and to the right, despite losing profit dollars on every transaction.
Scenario 1: Continuous Growth
- 20% MoM revenue growth
- DIO stays solid at 30 days
- CCC remains at –60 days
- Cash balance: $300k to $888k
- Payables exceed inventory: $455k
Now let’s apply two alternative scenarios.
Scenario 2: Growth Stops
What happens to that same business if growth plateaus in Jul and holds steady the rest of the year?
- 20% MoM revenue growth
- Past Jul, sales stay flat
- Inventory starts piling up
- DIO doubles to 60 days
- CCC shifts from –60 to –30
- Cash peaks then declines steadily
- Payables exceed inventory: $160k
Scenario 3: Growth Declines
Now, what happens when revenue wanes? Not disastrously, just a one-month reversion in Aug back to Jun’s sales.
- 20% MoM growth until Jul
- Revenue drops back to Jun’s level
- Inventory doesn’t just pile up
- You overorder for 2–3 months
- DIO explodes to 100 days
- CCC goes positive to +10 days
- Net cash flow falls off a cliff
- Inventory exceeds payables: $48.6k
The cascading effect happens fast.
You can literally go bankrupt in ~3 months when a negative CCC model falls apart.
One freight delay, one Facebook ad account issue, one minor hiccup — and you’re completely screwed.
Real-World Negative CCC Disaster
The only way to sustain negative CCC is through absurdly low DIO, which happens when you’re growing extremely fast with excellent supplier terms.
However, this often tempts founders to lose sight of unit economics. They’re willing to pay any CAC necessary to keep growing, because cash masks their problems.
Until it doesn’t.
In my model, I’ve accounted for rising CAC by degrading marketing efficiency, from 25% of revenue in Jan (MER 4.0) to 35% in Dec (MER 2.86).
When growth slows — and it always does — the dominoes start slamming into each other …
- Inventory stops moving as quickly
- DIO increases dramatically
- Holding costs increase likewise
- CCC shifts from negative to positive
- Cash outflows instantly exceed inflows
The most painful part? Many founders don’t realize they’re in trouble until it’s too late.
They’re looking at revenue growth while ignoring the P&L + balance sheet warning signs.
When Negative CCC Might Work
To be fair, there are specific scenarios where negative CCC functions as a sustainable feature of your business model:
- You genuinely plan to grow forever
- You have double-digit NET INCOME
- You’ve raised so much, you can weather anything
Negative CCC can be a strong characteristic temporarily, but it changes FAST and is NEVER sustainable long-term unless your unit economics are rock-solid.
Understanding Capital Efficiency
Having dismantled the myth, let’s explore three capital efficiency metrics that matter.
These are still balance sheet metrics, derived from the working capital accounts in your current assets and liabilities.
Knowing your balance sheet — not just at the current state, but how it will trend — separates good CFOs from great ones.
Anyone can diagnose unit economics problems and read a P&L. That’s truly only half the battle in consumer-good brands.
Working Capital Absorption Ratio
(Operating Working Capital / Annualized Revenue) * 100
WCAR measures the impact of changes in sales on working capital. It tells you whether or not you’ll have enough money to support continued growth.
Think of it as a predictor.
If you’re planning to double revenue next year, this ratio tells how much additional working capital you’ll need to absorb in support of that growth. Without this insight, you might hit your revenue targets but find yourself completely cash-strapped.
Net Working Capital to Revenue Ratio
Total Net Working Capital / Revenue
Expressing NWC as a percentage of revenue reveals how a company is utilizing working capital to generate sales.
The lower the output, the better. We always want to generate more sales with less capital.
If two similar businesses do $10M in revenue, but one ties up $2M in working capital while the other needs only $1M, the second is clearly operating more efficiently.
This ratio is a great benchmark against competitors or your own historical performance.
Return on Assets
Net Income / Total Assets
ROA takes the profits generated by assets on the books as a percentage. This metric is better when higher, for the same reason NWC is better when lower — more profits from less money tied up in assets.
It forces you to think holistically. Are you getting proper returns on your inventory? Are your facilities generating profits?
It cuts through vanity and shows whether you’re deploying capital effectively.
Tracking these metrics monthly is a great way to identify potential areas of optimization.
While cash conversion cycle gets all the hype, the others often reveal more actionable insights about your business’s financial health and sustainability.
The Path Forward
Negative CCC isn’t inherently evil.
It’s just dangerous when misunderstood or relied upon as a business model rather than recognized as a temporary consequence of rapid growth.
The ecommerce world has become enamored with hacks and shortcuts that promise infinite scale without solving the fundamental challenge of building a profitable business that generates cash.
Don’t fall for it.
Track capital efficiency metrics like working capital absorption ratio (WCAR), net working capital to revenue (NWC), return on assets (ROA), and CCC monthly. But also recognize them as diagnostic tools rather than goals unto themselves.
A healthy business generates profits first.
Positive cash flow should follow from strong operations … not financial engineering.
Drew Fallon is the cohost of Finance Operators, the founder of Iris Finance, and the former CFO of Mad Rabbit. Connect with him on X (Twitter) or LinkedIn for an avalanche of financial breakdowns — along with tools + hot takes.
Good Businesses Are Bought, Not Sold
Inside Tecovas: Reporting, Merchandising & Growing the Brand with CMO Krista Dalton
Money Talks: You Asked, We Answer
Stephen Borrelli (Cuts Clothing) and Panzer Talk Tariffs
Curated by the editor of CPG Wire, this week’s five biggest headlines in consumer news — it’s not all doom + gloom.
1. RX3 Growth Partners Backs Truvani: PR Newswire
Fast-growing clean nutrition brand Truvani closed a growth equity round led by RX3 Growth Partners. The investment marks Truvani’s first outside funding since launching in 2017. The company will use the funding to fuel growth at retail partners like Target, Walmart, Whole Foods, and Sprouts.
RX3 is also an investor in Orgain (exited), Mack Weldon, Therabody, Super Coffee, and a number of other brands.
2. Conagra Divests Chef Boyardee: Food Dive
Conagra Brands is selling Chef Boyardee, an iconic canned pasta brand, for $600M in cash. The buyer is Hometown Food Company, a portfolio company of Brynwood Partners.
Conagra is divesting the brand to focus on its higher-growth frozen food and healthy snacking divisions. In 2024, Chef Boyardee contributed $450M to Conagra’s net sales.
3. Alani Nu Continues to Crush: Business Wire
Celsius Holdings announced that Alani Nu surpassed $1B in retail sales for the trailing 52-week period. Celsius agreed to acquire Alani Nu for $1.8B in February due to lagging sales.
An expensive bet for Celsius, but it solves an existential growth problem for the energy drink maker. For context, Alani Nu’s retail sales jumped more than 72% year-over-year.
4. Legendary Investor Peter Harf Retires: Financial Times
Peter Harf, chair and managing partner of JAB Holding, is retiring after spending more than 40 years with the investment firm.
Harf took a parochial German chemicals company and turned it into a global juggernaut by acquiring stakes in Coty, Keurig Dr Pepper, JDE Peet’s, Panera, Krispy Kreme, and many other consumer businesses. It’s the end of an era as JAB seeks to diversify outside of consumer.
5. Heineken Bets on Energy Drinks in the UK: Global Drinks Intel
Dutch brewer Heineken has taken a minority stake in TENZING, a natural energy drink brand from the UK. Huib Van Bockel launched TENZING in 2016 after spending nearly a decade at Red Bull. For Heineken, the investment offers exposure to the fast-growing energy drink category in the UK.
TENZING will retain operational independence but will tap into Heineken’s considerable distribution resources.
Private Equity → Exit Preparing
Holy. Moly. You wonderful people wrecked my inbox, demanding Sean write a follow-up on how to prepare for an exit.
I not only shared your screenshots with him, but also texted ‘em to the full Operators group …
And a fight broke out.
Seriously, Jason Panzer wrote: “As someone who has done about 100 M&A transactions, I should probably write something. I can write a piece in response to Sean.”
Matt Bertulli sent back, “I’ve got something! Selling My First Company: What I Learned.”
That has never happened before 😂 usually, 95% of my job is chasing them around.
Panzer + Bertulli are hard at work. We’ll see if Sean joins the fray as well. Should hit your inbox in a week or two!
With thanks and anticipation,
Aaron Orendorff 🤓 Executive Editor
Disclaimer: Special thanks to Rivo for sponsoring the newsletter.