Cash conversion cycle

The cash conversion cycle measures how many days it takes a company to convert money spent on inventory back into cash collected from customers. It is calculated as days inventory outstanding plus days sales outstanding, minus days payable outstanding.

A shorter cash conversion cycle generally means a company needs less cash tied up in its day-to-day operations to run the business. Some companies, particularly those with strong supplier leverage, can even achieve a negative cash conversion cycle, effectively getting funded by their suppliers rather than needing to fund operations themselves.