cash conversion cycle

Cash Conversion Cycle

The duration between the purchase of a firm's inventory and the collection of accounts receivable for the sale of that inventory. Also known as cash cycle.

Notes:

Usually a company acquires inventory on credit, which results in accounts payable. The company will then sell the inventory on credit, which results in accounts receivable. Cash is therefore not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and the cash recovery.

This cycle is extremely important for companies whose focus is the retail sector. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the more working capital a business generates, and the less it has to borrow.

See also: Accounts Receivable, Inventory, Inventory Turnover, Sales to Cash Flow Ratio, Working Capital

---

Cash conversion cycle

The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable.

---

cash conversion cycle

The time required for a business to turn purchases into cash receipts from customers. A short cycle allows a business to quickly acquire cash that can be used for additional purchases or debt repayment.