| Cash Conversion Cycle |
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| CATEGORIES ABOUT CASH CONVERSION CYCLE | |
| corporate finance | |
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Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables Processing Period (in days) – Average Payables Processing Period (in days) with Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases. Average Receivables Processing Period (in days) = Accounts Receivables / Average Daily Credit Sales. Average Payable Processing Period (in days) = Accounts Payables / Average Daily Credit Purchases. A short cash conversion cycle is a sign of good working capital management. Conversely, a long cash conversion cycle indicates that capital is tied up while the business waits for customers to pay. It is quite possible for a business to have a negative cash conversion cycle, i.e. receiving payment from customers before it has to pay suppliers. Examples are typically companies which employ Just In Time practices such as Dell , and companies which buy on extended credit terms and sell for cash, such as Tesco . The longer the production process, the more cash the firm must keep tied up in inventories. Similarly, the longer it takes customers to pay their bills, the higher the value of accounts receivable. On the other hand, if a firm can delay paying for its own materials, it amy reduce the amount of cash it needs. In other words, accounts payable reduce net working capital. |
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