Cash conversion cycle.
In plain English
The cash conversion cycle adds days inventory outstanding to days sales outstanding, then subtracts days payable outstanding. In plain terms: how long goods sit, plus how long customers take to pay, minus how long the company takes to pay its own suppliers. A shorter cycle means cash comes back faster and less working capital is needed to run the same sales. Some retailers run a negative cycle because customers pay at the register while suppliers wait weeks, which effectively funds the business with supplier money. The measure is only comparable within an industry.
01Why it matters
Two companies with identical profit margins can have completely different cash needs, and this cycle is what explains why one is always borrowing and the other never is.
02The math, step by step
Inventory sits 60 days, customers pay in 45 days, and the company pays suppliers in 30 days. 60 plus 45 minus 30 is a 75-day cash conversion cycle, so cash is tied up for about two and a half months on each turn.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
The current ratio is a snapshot of short-term assets against short-term bills on one date. The cash conversion cycle measures speed over time. A company can pass the current ratio test and still be strangled by a slow cycle.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice