The cash conversion cycle measures how long a business takes to convert its investments in inventory and other resources into cash received from customers.
The cash conversion cycle calculates the number of days between paying for raw materials or inventory and receiving cash from the customer. It combines how long inventory is held, how long it takes to collect receivables, and how long the business can delay paying its own suppliers.
The cash conversion cycle tells you how many days each rupee spent on inventory is stuck in the business before it comes back as cash. A shorter cycle means cash returns faster and less working capital is required.
A business spends ₹100 on material today. The material becomes inventory, is converted to a finished product, sold to a customer, and the customer pays sixty days later. The ₹100 has been committed for approximately ninety days. Every day of that cycle requires cash to fund.
Days Inventory Outstanding: 45 days. Days Sales Outstanding: 60 days. Days Payable Outstanding: 30 days. Cash Conversion Cycle: 45 + 60 − 30 = 75 days. This means cash is committed for seventy-five days per operating cycle.
Growing businesses often discover that faster growth requires more working capital to fund the longer cash conversion cycle. A business growing at thirty percent may need substantially more working capital than one growing at ten percent.
Reducing the cash conversion cycle improves cash flow without necessarily increasing profitability. Actions include faster collection of receivables, more efficient inventory management, and negotiating longer supplier payment terms.