Cash conversion cycle

Cash conversion cycle is one of the indicators of activity and liquidity, which indicates the number of days beginning with the date of payment for purchased materials, labor and other costs up to collecting cash for the receivable.

Calculation formula

Inventory turnover period + Receivables turnover period – Days payable outstanding 

Cash conversion cycle can thus be reduced by

• quicker collection of receivables
• shorter period of inventories held in stock
• prolonging the payments to suppliers