The Cash Conversion Cycle is the amount of time it takes a company to convert its investments in inventory and other resources into sales. This will tell you how long it will take to sell your products once they’re in your inventory to receiving payment.
Cash Conversion Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Cash Conversion Cycle Details
(DIO) Days Inventory Outstanding is the average number of days it takes a company to turn its inventory into sales.
(DSO) Sales Outstanding is the average number of days it takes a company to collect its receivables.
(DPO) Days Payable Outstanding is the average number of days it takes a company to pay it’s payable.
The Cash Conversion Cycle assesses how efficiently a company manages its capital. The shorter the cycle the better a company is at sales. Comparing this metric with competitors can help with determining whether the company’s conversion is “normal”.