Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How a Rolling Average Smooths Cash Flow Chaos for Small Businesses
Transcript
- Lucas: I want to run a number by you. The average small business in the US experiences a swing in their cash balance of about 35 percent month to month — just from the normal rhythm of who pays when and what inventory arrives. Luna: That sounds exhausting. You'd never know if you're actually improving or just catching a good month. Lucas: Exactly. And that's the problem with most cash flow metrics — they're point-in-time. Your cash conversion cycle on March 31 might look great because three big clients paid early, but that doesn't tell you the underlying trend. Luna: So what's the fix? You've talked in previous episodes about smoothing seasonality, but I think you're after something more specific here. Lucas: I am. It's the rolling average cash conversion cycle. Instead of measuring your cash gap for just the last 30 days, you take the average over the last 6 months or 12 months. That single number filters out the noise and shows you whether your working capital efficiency is genuinely getting better or worse. Luna: Okay, I like the concept, but walk me through how it actually works. Say I'm a small hardware store — how do I calculate this? Lucas: Let's use a real-ish example. There's a regional hardware chain in the Midwest — four locations — that I've been following. They had a nightmare in 2022 when lumber prices spiked and then crashed. Their standard CCC was all over the place: one month it was 52 days, the next it was 38, then 61. The owner told me he couldn't tell if his inventory management was working or not. Luna: So he was making decisions based on random noise. Lucas: Exactly. So they started tracking a 6-month rolling average. Here's the simple math: take your total days sales outstanding, plus days inventory outstanding, minus days payables outstanding — that's your CCC for a single month. Then for the rolling average, you sum up the last 6 months of CCC values and divide by 6. That's your smoothed metric. Luna: And what did that look like for the hardware chain? Lucas: The raw monthly numbers swung wildly, but the rolling average stayed between 47 and 52 days for almost a year. That told them their core operations weren't broken — it was just timing. They could relax about the temporary spikes and focus on the things that actually moved the average, like negotiating better payment terms with one key lumber supplier. Luna: So the rolling average gives you a clearer signal about when to act and when to wait. But doesn't it also introduce lag? If you improve something today, you won't see it in your rolling metric for months. Lucas: That's the trade-off. A 6-month rolling average will take 6 months to fully reflect a change. But honestly, most working capital improvements — like renegotiating terms or cleaning up your inventory — take months to implement anyway. The lag is usually shorter than the process. Luna: Fair point. But what if you're in a crisis? You don't want to wait 6 months to know if you're bleeding out. Lucas: No, and that's why you run two metrics side by side: the raw month-over-month CCC for early warning, and the rolling average for trend. The raw number tells you 'we have a problem right now,' the rolling average tells you 'this problem is structural.' Luna: I think that's really practical. But I've also seen people fall in love with their rolling average and ignore warning signs. There's a psychological trap where you smooth out a real deterioration. Lucas: That's real. If your raw CCC jumps from 45 to 65 in one month, and your rolling average only moves from 50 to 52, you might shrug it off. But that jump could be a customer that just stopped paying. You need to investigate the raw spike, even if the average looks stable. Luna: Right. So the rolling average is a tool for steady-state management, not for crisis detection. How do you actually set it up in practice? Most small businesses aren't running complex ERP systems. Lucas: You can do it in Excel or Google Sheets in about 15 minutes. You need three things each month: your total receivables, your total inventory, and your total payables. Also your monthly sales and cost of goods sold. From there, DSO is receivables divided by average daily sales. DIO is inventory divided by average daily COGS. DPO is payables divided by average daily COGS. Then just sum the last 6 months of CCC values and divide by 6. Luna: And update it every month. So after a year, you have 7 rolling average data points — months 6 through 12. That's enough to start seeing a trend. Lucas: Exactly. And that trend becomes the basis for real decisions. If your rolling average has crept up from 48 to 54 over 6 months, you know something is degrading — maybe your inventory turnover is slowing or customers are taking longer to pay. You can dig into the components to find the culprit. Luna: I'm convinced. One last question: what window length should people start with? 6 months? 12 months? Lucas: Start with 6 months. It gives you enough smoothing to remove monthly noise but is responsive enough to show meaningful change within a quarter or two. A 12-month average is very stable but very slow. Use 6 months for operational decisions and maybe 12 months for annual planning. Luna: That makes sense. And honestly, this whole approach fits with something I've been thinking about — how many small business owners get whipsawed by their own data because they don't have the right lens. Lucas: Yeah. And that's why we do this show — to give people those lenses. If these conversations have helped you make sense of your own numbers, or given you a framework that actually changed how you manage cash, that's exactly why we keep making them. We deliberately don't run ads on these episodes, and listener support is what makes that possible. If you'd like to keep the show ad-free and independent, you can find us at buy me a coffee dot com slash fexingo. Luna: It's a small gesture that adds up. We really appreciate everyone who's chipped in already — it helps us stay focused on the content rather than chasing sponsors. Lucas: Absolutely. So back to the rolling average — I want to leave listeners with one specific action. This week, go back and calculate your CCC for each of the last 6 months. Use your actual month-end numbers. Then compute the 6-month rolling average. Compare it to your most recent single-month CCC. If the single-month number is dramatically different from the rolling average, ask yourself why. That gap is where the insight lives. Luna: And if you see the rolling average trending up over several months, that's your cue to look at which component is driving it. Is it DSO? DIO? DPO? Then you have a specific problem to solve. Lucas: Right. The rolling average takes the panic out of cash flow management. It gives you permission to think strategically rather than reactively. And that's the whole point.