Cash conversion cycle

A ratio compares two figures to reveal something neither number shows on its own. The cash conversion cycle combines three separate efficiency measures into one number, showing how long a company's cash stays tied up in its day to day operations.

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 combines days inventory outstanding and days sales outstanding, minus days payable outstanding.

The formula is:

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.