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How to Calculate Cash Conversion Cycle

Cash conversion cycle tells the period in which we collect our cash if we invest our money in inventory and then we sell it on credit. If cash conversion cycle is positive, it means, we have more time for collecting money  from inventory and credit sales than payment to creditors. At that time, we have to maintain other sources of cash for our operation of business. If cash conversion cycle is negative, it means, we can collect money more quickly  from our inventory and credit sales than payment to our creditors. At that time, we can take decision to invest this money in other projects.

Following is the simple formula for calculation of  cash conversion cycle or period


= Inventory conversion period + Receivables conversion periodPayables conversion period

or

= 365 / inventory turnover ratio + 365 / debtors turnover ratio - 365/ creditors turnover ratio


Following is example which explain this concept 













Actually cash conversion period is nothing but it is the part of whole cycle which is created with inventory, debtor and creditor conversion cycle.






















Both days payable outstanding and days sales outstanding will tell you the exact position of cash conversion period. Our aim of studying cash conversion cycle and its calculation is to change the policies relating to credit purchase and credit sales. We can change our standard of payment of credit purchase or getting cash from our debtors on the basis of reports of cash conversion cycle. If it tells good cash liquidity position, we can maintain our past credit policies.  Its also aim is to study cash flow of business. Cash flow statement and cash conversion cycle study will be helpful for cash flow analysis. 

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Accounting Education: How to Calculate Cash Conversion Cycle
How to Calculate Cash Conversion Cycle
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Accounting Education
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