A metric that expresses the length of time, in days, that it takes for a company to co
nvert resource inputs into cash flows. The cash co
nversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is co
nverted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties.
Also known as "cash cycle".
Calculated as:
Where:
DIO represents days inventory outstanding
DSO represents days sales outstanding
DPO represents days payable outstanding
|||Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash co
nversion cycle measures the time between outlay of cash and cash recovery.
This cycle is extremely im
portant for retailers and similar businesses. This measure illustrates how quickly a company can co
nvert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company's bottom line.