A service center with $50 million in annual revenue, 30-day average payment terms to mills, and 45-day average collection from customers has a 15-day cash gap. At $137,000 in daily cost of goods, that 15-day gap means the company needs $2 million in working capital just to bridge the timing difference between paying suppliers and collecting from customers. When steel prices spike, that gap widens because the dollar value of inventory increases even if the tonnage stays the same.
The Cash Conversion Cycle
Your cash conversion cycle is the number of days between paying for inventory and collecting cash from the sale of that inventory. It has three components: Days Inventory Outstanding (DIO, how long material sits before selling), plus Days Sales Outstanding (DSO, how long customers take to pay), minus Days Payable Outstanding (DPO, how long you take to pay your suppliers).
For a typical service center: DIO of 60 days (inventory turns of 6), plus DSO of 42 days, minus DPO of 30 days equals a cash conversion cycle of 72 days. That means for every dollar of revenue, you need to fund 72 days of working capital. Shortening any of those three components frees up cash.
Shortening Days Inventory Outstanding
Faster inventory turns mean less capital tied up in steel sitting on your floor. The most direct way to improve turns is to reduce slow-moving inventory. Pull a report of every item that has not moved in 90 days. Assign each item to a sales rep with a deadline: sell it in 30 days at a reduced margin or it gets scrapped. That material is costing you 1% to 1.5% per month in carrying costs (interest, insurance, warehouse space, obsolescence risk). A $0.01 per pound margin on a quick sale is better than $0.02 per pound loss on material that sits for another six months.
Better purchasing discipline also helps. Order what you will sell in the next 60 to 90 days, not what the mill rep is pushing because they need to fill an order book. Every ton of inventory you buy should have a customer or a market waiting for it. Speculative purchases (buying ahead of expected price increases) can be profitable but they lengthen your DIO and consume working capital.
Shortening Days Sales Outstanding
Getting customers to pay faster starts with invoicing faster. If you ship on Monday and invoice on Friday, you just added 4 days to your DSO for free. Invoice on the day of shipment. Better yet, email the invoice automatically when the BOL is signed. Many service centers have cut 5 to 7 days off their DSO simply by eliminating the delay between shipment and invoice generation.
Credit management is the other lever. Run credit checks on every new account. Set credit limits and enforce them. When a customer hits their credit limit, put their next order on hold until they pay. This is uncomfortable, but the alternative is extending unlimited credit to customers who pay at net-60 or net-90 while your mills expect payment at net-30.
Offer a 1% discount for payment within 10 days (1/10 net 30). On a $10,000 invoice, the customer saves $100 by paying 20 days early. That $100 costs you less than the interest you would pay on $10,000 of borrowed working capital for those 20 days. Both sides win.
Extending Days Payable Outstanding
Paying your mills later frees up cash, but it has limits. Extending beyond agreed terms damages your relationship and can result in credit holds that stop your supply. The better approach is to negotiate longer terms upfront: net-30 instead of net-15, or net-45 if your volume justifies it. Some mills offer extended terms on specific programs or during soft market periods.
Watch the early payment discounts your mills offer. A 1% discount for payment in 10 days on a net-30 invoice is equivalent to an 18% annualized return. If you have the cash, take that discount every time. If you do not have the cash, that tells you something about your working capital management.
The Weekly Cash Forecast
Build a rolling 13-week cash forecast. Every Friday, update it with actual collections, actual payables, and projected cash needs for the next 13 weeks. This forecast gives you early warning when a cash crunch is coming (you can draw on your credit line in advance instead of scrambling) and visibility into when excess cash is available (you can pay down debt or take advantage of a buying opportunity).
Cash flow management is not glamorous. It is the difference between a service center that survives a market downturn and one that does not.