Cash conversion cycle

The number of days between money leaving the business to buy or make something and money arriving from the customer who bought it. Days of receivables plus days of inventory minus days of payables.

Example

Northgate's 68.7 plus 115.9 minus 86.9 is 97.7 days, up from 81.0 days a year earlier.

Important

Every day in this figure is funded out of the company's own pocket, so it lengthens the funding requirement of every additional sale. A negative cycle, where customers pay before suppliers do, reverses the whole diagnosis.

Related terms

• Working capital — The money tied up in ordinary trading. The operating version - receivables plus inventory minus payables - excludes cash and borrowings, and is the one that behaves like a use of money.
• Days sales outstanding — How long customers take to pay, on average - receivables divided by revenue, times 365.
• Days payable outstanding — How long the business takes to pay its own suppliers - payables divided by cost of goods sold, times 365.

Lessons that explain it

• A growing company can run out of cash while its revenue rises — How customers pay and how quickly they pay changes cash needs. Diligence checks billing terms, receivables and working capital, not only revenue and profit. (10 min)
• Working capital: the cash growth eats — Between selling something and being paid for it, a business funds the gap out of its own pocket. Working capital is the size of that gap, and it is why growing companies run out of money. (11 min)

All 578 terms in the Investing glossary