Answers the Question
How long does it take for our inventory investments to turn into cold hard cash?
Calculator for Cash Conversion Cycle
What Is the Cash Conversion Cycle?
This calculation looks at the lifecycle of a sale and how long it takes to turn inventory into income. At its heart, it is essentially a combination of three other common financial calculations:
- Days Inventory Outstanding - How long to sell inventory?
- Days Sales Outstanding - How long does it take to collect cash from the sales?
- Days Payable Outstanding - When will payables need to be paid?
Why Is it Important?
- All things being equal, the faster the cash conversion cycle, the more often a firm can reinvest its income into additional profit-seeking ventures.
Formula(s) to Calculate Cash Conversion Cycle
- CASH CONVERSION CYCLE = DAYS INVENTORY OUTSTANDING + DAYS SALES OUTSTANDING - DAYS PAYABLE OUTSTANDING
- Focusing operations on reducing the length of the cash conversion cycle may appear tempting, but it may also require undesirable trade-offs that reduce overall profits.