Growing EBITDA does not mean a company has enough cash to fund its next investment. Money can remain tied up in stock, unpaid invoices or capital projects whose costs exceed the plan. McKinsey sets out four practices for CFOs, but the decisions behind them extend across the business. A CEO needs to understand where the cash conversion cycle slows, who can change it and whether short-term improvements would damage customers or suppliers.
Why a profitable business may still run short of cash
Profit is an accounting measure; cash becomes available only after customers pay, inventory moves and spending on assets is controlled. McKinsey describes cash conversion as an operational system rather than a report produced at the end of the month. A sales team may win revenue with payment terms that finance cannot absorb. Procurement may secure a lower unit price by buying stock earlier or in greater quantities than the business needs. Operations may keep extra buffers because planning across functions is unreliable. A capital project may have been approved with an attractive return but release payments faster than benefits arrive. Each choice can look rational within a department’s target and still weaken the company’s total liquidity. This matters especially when interest rates, demand or the cost of materials change: a thin cash buffer reduces the room to make strategic decisions. The CEO should therefore ask where money actually sits, for how long and which management decision put it there. A more forceful reminder to “collect cash faster” cannot replace a diagnosis of the commercial and operational incentives that keep it locked away.
Turn cash conversion into a cross-functional practice
McKinsey’s recommendations bring together disciplined working-capital management, a more accurate view of cash flow, capital expenditure choices and accountability for implementation. Receivables, payables and inventory should not be treated as independent levers to be maximised without regard to the rest of the business. Tightening a customer’s terms can change demand or relationships; delaying payment to a critical supplier can increase risk in the supply chain. The right question is which terms and stocks are justified by the economics of a product and which are simply inherited habits. A practical review joins the CFO with leaders of sales, procurement, operations and the relevant business units. They compare expected and actual cash movement, identify a small number of material deviations and agree who can change the underlying process. Capital spending needs the same discipline. A project should be staged around decisions that unlock value, with assumptions revisited as new evidence appears, rather than protected because it was once authorised. This is a management cadence, not a one-off campaign for a quarterly cash target.
What a CEO should ask before demanding faster cash
Begin with a bridge between reported profit and available cash. Which product lines, customer groups or projects absorb the greatest amounts, and is the reason visible at transaction level? Next, inspect the decision rights: who approves unusual payment terms, inventory buffers or a change in a capital-project schedule? If the answer crosses several functions without one accountable owner, improvements may be temporary. Then test the cost of each proposed action. Selling stock at a steep discount, cutting a valuable supplier’s terms or stopping maintenance may improve this month’s cash while weakening next year’s business. The aim is to release cash sustainably, not to produce a good-looking snapshot. The CEO and CFO can make the conversion cycle a regular item in the leadership rhythm, linking measures to specific commercial and operational choices. McKinsey’s article is useful precisely because it moves the discussion beyond a finance-only dashboard. The board should be able to see not just a number, but how management will protect liquidity while funding the opportunities that matter most.
Key takeaways
- EBITDA and cash are different: inventory, receivables and capital spending can absorb the money needed for growth.
- Sales, procurement and operations make many of the choices that determine the cash conversion cycle.
- Better terms are not always better economics if they damage customers, suppliers or resilience.
- The CEO and CFO need a recurring cross-functional review tied to decisions and owners.
What this means for CEOs
A CEO should ask where cash is trapped, which decision put it there and what releasing it would cost elsewhere. Sustainable liquidity comes from changing the operating system, not merely the finance report.