Cash Flow

Cash Conversion Cycle

Definition

The number of days between paying your supplier and collecting cash from the customer. The longer the cycle, the more cash your growth consumes.

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Formula

Cash Conversion Cycle = Days Inventory On Hand + Days Sales Outstanding − Days Payable Outstanding

The cash conversion cycle explains why a profitable, growing inventory business can still run out of cash. You pay for stock months before the sales come back, and the faster you grow, the more cash that gap swallows.

You can shorten it three ways: hold less inventory, get paid faster, or negotiate longer supplier terms. Watch for: a cycle that keeps getting longer as you scale, which usually shows up as a cash crunch before peak season.

Example

90 days of inventory, 14 days to receive marketplace payouts and 30-day supplier terms gives a 74-day cycle.

Terms that reference this

13-Week Cash Flow Forecast Days Inventory On Hand (DIO)Days Payable Outstanding (DPO)Days Sales Outstanding (DSO)Inventory Turnover Working Capital

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Cash Conversion Cycle

Related terms

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