In short
The cash conversion cycle measures how long cash is tied up in operations: days of inventory outstanding plus days of sales outstanding minus days of payables outstanding.
Key takeaways
- Collecting from customers faster or paying suppliers later shortens it.
- The operating cycle is inventory days plus receivable days, before subtracting payables.
- A shorter cycle generally means less need for working capital financing.
Example
Inventory 60 days + receivables 45 days − payables 30 days = 75 days.
Where it's tested
BAR: Financial Statement Analysis — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company's days inventory outstanding is 60, days sales outstanding is 45 and days payables outstanding is 30. What is its cash conversion cycle?