Cash conversion cycle
Cash Cycle
The cash conversion cycle is the number of days between paying for raw material and receiving cash from the final sale.
Formula
Cash conversion cycle
Cash Cycle (days) = Inventory Days + Receivable Days − Payable Days
Benchmark: Lower is better; negative is excellent
Reading the number
Buy cloth for T-shirts and pay on the 1st. Stitching takes 10 days. Selling takes 20 more. The money returns on the 30th, so the cash cycle is 30 days.
The cycle reveals two things at a glance: whether the company can collect from customers on time, and whether it can actually convert its assets into sellable goods. A negative cycle, where cash from customers arrives before suppliers are paid, tells you the company's reputation and bargaining power are extremely strong. Suppliers and distributors both accept unfavourable terms to keep the relationship.
Indian example
Related ratios
Glossary terms
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