Financial Management
Measure the cash conversion cycle
A business pays its suppliers before customers pay it. How long must it finance the gap?
Practise measure the cash conversion cycle with a worked example and a short check.
Add inventory days and collection days, then subtract supplier payment days.
Cash conversion cycle = inventory days + receivable days − payable days
45 inventory days + 38 collection days − 30 supplier days = 53 days.
A distributor holds stock for 45 days, collects in 38 and pays suppliers in 30. The cycle is 53 days.
45 inventory days + 38 collection days − 30 supplier days = 53 days.
If supplier terms shorten by seven days while other inputs stay fixed, what happens to the cycle?