Diligence
Cash conversion
Cash conversion is how much of your EBITDA arrives as cash. It decides how much of the reported figure is real for servicing debt, which is why the affordability lens can cap a facility below whatever the multiple advertises.
Also called cash conversion ratio · EBITDA to cash conversion · cash generation · quality of earnings conversion
The multiple is applied to EBITDA. The debt is serviced out of cash. Conversion is the gap between the two.
| Conversion | Cash |
|---|---|
| Around 90% | £1.8m |
| 70% | £1.4m |
| 50% | £1m |
Cash arising from £2m of EBITDA at three conversion rates. Around 90% is the published clean-credit figure; 70% and 50% are illustrative points to show the slope, not published thresholds. No minimum conversion is published.
What it measures
How much of your EBITDA arrives as cash.
EBITDA is an accounting measure. It records earnings before interest, tax, depreciation and amortisation, and it says nothing about whether those earnings turned into money in the bank during the period. Cash conversion is the ratio that closes that gap.
The reason a lender cares is direct: debt is serviced out of cash, not out of an accounting line. Cash conversion decides how much of the EBITDA is real for servicing debt, which is why the affordability lens can cap the number below whatever the multiple advertises.
What it is not
It is not the same as cash available for debt service, and the two are frequently confused in conversations where the difference matters.
Cash conversion looks at EBITDA turning into operating cash. Cash available for debt service is a narrower figure taken after cash tax, maintenance capital expenditure and the working capital movement. On a worked example used across these pages, £2m of EBITDA leaves about £1.11m available for debt service, which is a little over half, while the same business might report cash conversion well above that.
Both numbers are useful and they answer different questions. Conversion tells you about the quality of the earnings. Cash available for debt service tells you what is left to pay the lender after the business has paid for its own continuation.
It is worth checking which one a lender means when they ask, because the same business can look strong on one and ordinary on the other.
Growth is the most common reason good businesses convert badly. Every extra pound of revenue funds itself before it pays anybody.
| Revenue growth | Cash absorbed |
|---|---|
| Flat | £0m |
| 10% growth | £0.2m |
| 25% growth | £0.5m |
Illustrative: a £10m-revenue business carrying working capital equal to 20% of revenue, at three growth rates. Derived arithmetic to show the mechanism; the ratio varies widely by business and no convention is published.
Why it gates the multiple
Because the published leverage ranges are conditional on it, which is easy to miss when the ranges are quoted on their own.
Bank senior debt runs broadly at two and a half to three and a half times EBITDA with decent cash conversion. The qualifier is doing real work in that sentence. A business converting well sits in that range; a business leaking earnings into working capital and capex does not, whatever its EBITDA multiple would suggest.
So each published range should be read as a ceiling, not a target. The top of a tier is reserved for the cleanest credit a lender in that category sees, and most businesses sit lower, because the lender quotes the top of its appetite and marks it down for cyclicality, customer concentration and thin cash conversion.
A business that converts 90% of EBITDA into cash can carry more than one that leaks it, whatever the multiple says, because the affordability lens runs on cash rather than on an accounting line.
The two lenses
A lender sizes a facility twice and takes the lower answer.
The multiple lens asks what a business of this quality in this sector will support as a multiple of scrubbed EBITDA. The affordability lens asks whether the cash services the resulting debt at the covenant levels being proposed. Where conversion is strong the two answers converge. Where it is weak, affordability binds first and the multiple never gets applied in full.
This is why a borrower can be quoted a headline multiple by one lender and a smaller facility by another with an apparently identical appetite. The second lender has run the affordability test more carefully, and the answer it produced is the answer that governs.
It also means arguing about the multiple is usually the wrong conversation. If affordability is the binding constraint, a better multiple changes nothing.
Where the cash goes
Into working capital and into capital expenditure, in that order of surprise.
Working capital absorption is the one that catches people out, because it scales with growth rather than with difficulty. A business selling more has more money tied up in stock and debtors, and that money is earned but not yet arrived.
Capital expenditure is more visible but harder to argue with. A business replacing plant continuously converts less of its earnings than one whose assets are long-lived, and the distinction between maintenance and growth capex is exactly where the argument happens in diligence.
Cash tax completes the picture. It is often smaller than either but it is the least negotiable, and a business with few allowances converts worse than one carrying capital allowances forward.
Conversion is an operational property before it is a financial one. Most of what moves it sits inside the business.
| Lever | Effect |
|---|---|
| Supplier payment terms | 5–28 on the scale |
| Stock turns | 25–50 on the scale |
| Debtor days | 42–68 on the scale |
| Capital intensity | 60–82 on the scale |
| The revenue model itself | Decides the ceiling |
Levers ranked by how much each typically moves conversion. Illustrative of market practice, not measured data; the balance differs by business model.
The growth paradox
The best trading year frequently shows the worst conversion, and a lender reading the numbers without the explanation will draw the wrong conclusion.
On a business with £10m of revenue carrying working capital equal to a fifth of it, flat trading absorbs nothing. Growing 10% adds £1m of revenue and absorbs £200,000 into debtors and stock. Growing 25% adds £2.5m and absorbs £500,000. EBITDA is rising through all of that and cash is falling behind it.
This is a good problem and it still needs financing. The right response is not to suppress growth but to fund the working capital explicitly, whether through a revolving facility sized on the swing or an asset-based line that flexes with the debtor book as the invoices are raised.
What does not work is presenting a growth year's conversion without the bridge. A lender who sees weak conversion and no explanation prices a weak business, and the borrower pays for a story they failed to tell.
What moves it
Operational levers mostly, and the ceiling is set by the revenue model before any of them apply.
A business billing in advance on subscription converts very differently from one billing in arrears on completion, and no amount of credit control closes that gap. Within a given model, the levers in ascending order of effect are supplier payment terms, stock turns, debtor days and capital intensity.
Debtor days repay attention out of proportion to the effort, because they are usually the largest single number and often the least managed. Reducing average collection by a fortnight on a £10m-revenue business releases a meaningful sum permanently, and unlike a one-off it does not reverse.
The point worth holding is that none of these is a financing question. Conversion is an operational property of the business that finance reports on, which is why improving it before a raise is one of the few things a borrower can do that a lender will read as fundamentally better rather than better presented.
How it gets read
With the bridge, over three years, and with the growth years explained.
The useful presentation shows EBITDA and operating cash side by side for three years, the movements that separate them, and a short account of anything unusual. Where a year converts badly because of growth, show the revenue increase alongside it so the cause is visible rather than inferred.
The split between maintenance and growth capex has to be explicit and defensible, because a diligence accountant will test it and an unsupported classification will be resolved against you.
And if conversion is weak for structural reasons, say so and propose the structure that suits it. A business whose balance sheet is bigger than its earnings suggest may be better served by a facility sized off the assets than by a cash-flow multiple that affordability will cap anyway.
Common questions
What is cash conversion?
How much of your EBITDA arrives as cash. EBITDA is an accounting measure that says nothing about whether earnings turned into money during the period; cash conversion closes that gap. Lenders care because debt is serviced out of cash, not out of an accounting line.
What cash conversion do lenders want?
No minimum is published. The guides describe a clean credit as converting around 90% of EBITDA into cash, and note that published leverage ranges assume decent conversion. Rather than a threshold, treat it as the factor that decides where in a range you sit and whether affordability caps the facility below the multiple.
Is cash conversion the same as CFADS?
No. Conversion measures EBITDA turning into operating cash. Cash available for debt service is narrower, taken after cash tax, maintenance capex and the working capital movement. On a worked example, £2m of EBITDA leaves about £1.11m available for debt service, a little over half, while the same business could report conversion well above that.
Why does cash conversion limit my borrowing?
Because a lender sizes twice and takes the lower answer: once on a multiple of scrubbed EBITDA, once on whether the cash services the debt. Where conversion is weak, affordability binds first and the multiple never applies in full. Arguing about the multiple changes nothing when affordability is the constraint.
Why did my conversion fall in a good year?
Growth absorbs working capital. On £10m of revenue carrying working capital equal to a fifth of it, growing 10% absorbs £200,000 into debtors and stock and growing 25% absorbs £500,000, while EBITDA rises. The best trading year often shows the worst conversion, which is why the bridge needs presenting rather than leaving to inference.
What improves cash conversion fastest?
Debtor days, usually, because it is the largest number and often the least managed, and the improvement does not reverse. Stock turns and supplier terms help at the margin. Capital intensity and the revenue model set the ceiling and are much harder to move.
How should I present conversion to a lender?
EBITDA and operating cash side by side for three years, the movements that separate them, and a short account of anything unusual. Show revenue growth next to any year that converted badly for that reason, and separate maintenance from growth capex explicitly, because diligence will test the split.
What if my conversion is structurally weak?
Say so and propose a structure that suits it. A business whose balance sheet is larger than its earnings suggest may be better served by a facility sized off the assets, which the affordability lens on a cash-flow multiple would cap anyway.
The full treatment sits in the guide: how much can my business borrow.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.