A growing company books the profit before it collects the cash

Three accounts stand between a sale and its cash

A sale rarely turns into cash the instant it is recorded. Between the two sit the parts of a business that hold money while it works: goods waiting on a shelf, invoices waiting to be paid, bills the company has not yet settled. In fiscal 2024, e.l.f. Beauty earned net income of $127.7 million while its operations produced $71.2 million of cash, in a year when net sales rose about 77%.¹ Both figures are genuine, and the $56.5 million between them had gone somewhere.

Three operating accounts hold that money. Accounts receivable is the cash customers owe for goods already delivered, a sale counted as revenue but not yet paid for. Inventory is the cash held in goods bought or built and not yet sold. Accounts payable is the cash the company still owes its own suppliers for goods it has already received. Taken with a firm's other short-term assets and debts, these define net working capital, current assets less current liabilities.² The first two tie cash up. The third, because it is money the company gets to keep holding, sets cash free.

Reading the change as a use or a source of cash

A balance sheet shows these accounts on a single day. What moves cash is the change in them from one period to the next. When receivables grow, the company has delivered more goods than it has collected on, so cash is out in the market instead of in the bank, and the increase is a use of cash. When inventory grows, cash has gone into goods still sitting unsold, another use. When payables grow, the company is holding onto cash it owes, which is a source of cash. The cash flow statement records exactly these changes. Under the indirect method it starts from profit and adjusts for the period's changes in inventories, receivables, and payables, among other items, to reach cash from operations.³

e.l.f.'s fiscal 2024 shows each of those lines with its sign.

The four lines net to a use of $117.5 million. Set against net income of $127.7 million, the operating accounts absorbed almost a full dollar for every dollar of profit the company earned that year. Cash from operations still came in positive, at $71.2 million, because high-margin profits carry large non-cash charges like depreciation and stock compensation that the statement adds back.¹ Working capital did not turn the year's cash negative. It pulled cash well below profit.

One caution when reading these accounts. The change on the balance sheet is not always the change in cash. e.l.f. bought the skincare brand Naturium during the year for about $355 million, and the acquired inventory and receivables landed on the year-end balance sheet without being cash the operating business had spent.⁴ The cash flow statement strips those out and reports only the operating change, which is why its figures, not the balance-sheet difference, carry the cash story.

Why the same growth that lifts profit drains cash

Growth is what turns this into a problem worth watching. A dollar of new sales does not arrive as a clean dollar of cash. To make the sale the company first builds or buys inventory, paying for it in advance. When the sale lands it becomes a receivable, cash the customer will send later. Suppliers cover part of that gap through payables, but for most manufacturers and retailers they do not cover all of it. So each added dollar of sales carries a fraction of a dollar that stays tied up in the accounts, and the faster sales rise, the larger the balances the company must carry at once.

e.l.f.'s own record makes the point without a second company. In fiscal 2023, sales grew more slowly and cash from operations was $101.9 million against net income of $61.5 million: the business generated more cash than it booked in profit. In fiscal 2024, with sales up 77%, cash from operations fell to $71.2 million while net income rose to $127.7 million.¹ The company did not become less profitable. It grew fast enough that its receivables and inventory swelled, and funding those balances took the cash that profit would otherwise have delivered.

Counting how long a dollar stays tied up

A single figure for cash tied up says how much but not how long, and duration is what decides whether the tie-up is a passing feature or a standing cost. Three counts measure it. The first is the number of days a dollar sits in inventory before it sells, average inventory divided by the cost of goods sold, times 365. Call it days inventory outstanding. The second is the number of days a sale waits as a receivable before the cash arrives, average receivables over sales, times 365: days sales outstanding. The third is the number of days the company waits before paying its own suppliers, average payables over the cost of goods sold, times 365: days payable outstanding.⁵

The first two are days the company's cash is out. The third is days it is holding someone else's. The net, the cash conversion cycle, is the first two counts less the third.

For e.l.f. in fiscal 2024 the counts run to about 166 days in inventory, 34 to collect a sale, and 68 to pay suppliers. Together they net to a cash conversion cycle of about 132 days.¹⁵ Read plainly, a dollar the company spends to make a lipstick takes roughly four months to come back as cash from selling it. Because that year's balances were swollen by both rapid growth and the Naturium purchase, treat the 132 days as directional.⁴

When the cycle runs backward

Nothing in the arithmetic forces the cycle to be positive. If a company pays its suppliers later than it collects from its customers and clears its inventory, the third count exceeds the first two and the cycle turns negative. A negative cycle describes the levels a business settles at: it collects each sale before it has to pay for the goods behind it, so its suppliers, and not its own cash, carry the inventory on its shelves.⁶

AutoZone runs its business this way. At the end of fiscal 2025 it owed suppliers $8.0 billion in accounts payable against $7.0 billion of merchandise inventory. Payables were about 114% of inventory, so vendors had financed every dollar of goods on the shelves and then some.⁷ Its current liabilities exceeded its current assets by about $1.18 billion, so net working capital was negative.⁷ The company's own disclosures describe the approach plainly: negotiating extended payment terms and optional supplier finance arrangements so it pays late while its fast-moving parts sell quickly.⁷ Run the same three counts and its cycle comes out near negative 33 days.

That negative cycle is a fact about the levels on AutoZone's balance sheet, and it is easy to mistake for a claim about a single year's cash. In fiscal 2025 AutoZone's own change in working capital was a use of about $311 million, because its inventory grew more in dollars than its payables did. Operating cash flow of $3.12 billion still ran above net income of $2.50 billion. But it did so for the reason e.l.f.'s cash stayed positive: non-cash charges like depreciation added back to profit, not working capital handing over cash.⁷ What the negative cycle changes is structural. Because its suppliers finance the inventory on the shelves, AutoZone carries a stock of goods that size while tying up almost none of its own cash. The same three accounts that hold a growing manufacturer's cash hostage can, arranged so suppliers fund the inventory, leave a retailer's own cash barely touched.