Calculate the Cash Conversion Cycle
Calculate and interpret a cash conversion cycle from operating days.
A distributor needs to explain why cash tightened even though sales grew. Average inventory is $780,000, receivables are $1,050,000, payables are $560,000, daily cost of goods sold is $20,000, and daily credit sales are $25,000. Cash Conversion Cycle = DIO + DSO - DPO The common shortcut is to stare at dollar balances and debate whether they look high. The cycle forces timing: how many operating days are funded before cash returns? Before Inventory, receivables, and payables are discussed as separate balances, so nobody can tell which timing change absorbed cash. After The team sees a 53-day cash conversion cycle…
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