Cash Conversion Cycle

The cash conversion cycle combines three measures. Days inventory outstanding is how long stock is held before being sold. Days sales outstanding is how long customers take to pay. Days payable outstanding is how long the business takes to pay its suppliers. The cycle equals the first two added together, minus the third.

For example, a company holds inventory for 73 days, collects from customers in 73 days and pays its suppliers in 36.5 days. Its cash conversion cycle is 109.5 days. That is how long, on average, its own cash is tied up in operations.

A shorter cycle means the business needs less cash to fund its operations. Some businesses, such as large retailers and online platforms, have negative cycles: they collect money from customers before they have to pay suppliers, effectively using suppliers' money to fund their operations.

A lengthening cycle can be a warning sign, suggesting slow-moving inventory, customers paying later or the business paying suppliers faster than before. Managing the cash conversion cycle is a key part of working capital management and can free up significant amounts of cash.