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Cash Conversion Cycle measures the average period it takes a company to acquire and sell Inventory, collect Receivables and pay Payables, demonstrating the efficiency with which cash flows through the business.

Calculation

Cash Conversion Cycle
=	Days Receivables Outstanding
+	Days of Inventory
–	Days Payables Outstanding

where

• AE11 = The average number of days it takes a company to collect cash generated from sales
• AE12 = The average number of days worth of Inventory the company holds on its books.
• AE13 = The average number of days the company takes to pay its invoices.

Unit of measure: Days (Calendar days)

Importance

Companies that measure and optimize working capital will be in a better position to prevent a working capital deficit. A working capital deficit can damage the profitability of the business and affect its operations in the short term. In the long term, poor working capital management can compromise a company’s ability to attract potential investors.

A lower number of days indicate a better Cash Conversion Cycle. A negative number is the most desirable as this indicates the company receives cash before paying it, thus eliminating the need to finance purchased materials and services. Reducing the Cash Conversion Cycle frees up cash.

According to a study by REL, a division of The Hackett Group, on average, top-performing U.S. companies have 49% less working capital tied up in operations, collect from customers nearly 18 days sooner, pay suppliers 11 days later, and hold less than half the inventory of median companies.

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Hierarchy

ID	Name	Level	x
AE	Asset Efficiency	0	AE
AE1	Cash Conversion Cycle	1	AE1
AE11	Days Receivables Outstanding	2	AE11
AE12	Days of Inventory	2	AE12
AE13	Days Payables Outstanding	2	AE13

Process(es)

ID	Name	Level	x
P	Plan	1	P
P1	Plan Supply Chain Operations	2	P1
P2	Plan Source	2	P2
P3	Plan Make	2	P3
P4	Plan Deliver	2	P4
S	Source	1	S
S1	Source-to-Replenish	2	S1
S2	Source-to-Order	2	S2
S3	Source-to-Engineering-Order	2	S3
S4	Source Returns	2	S4
M	Make	1	M
M1	Make-to-Stock	2	M1
M2	Make-to-Order	2	M2
M3	Make-To-Engineering-Order	2	M3
M4	Re-Make	2	M4
D	Deliver	1	D
D1	Deliver-From-Stock	2	D1
D2	Deliver-to-Order	2	D2
D3	Deliver-To-Engineering-Order	2	D3
D4	Deliver Returns	2	D4

Term(s)

ID	Name	Clear	x
AP	Accounts Payable		AP
AR	Accounts Receivable		AR
DRP	Distribution Requirements Planning		DRP
DRP-II	Distribution Resource Planning		DRP-II
INV	Inventory		INV
MRP-II	Manufacturing Resource Planning		MRP-II
MRP	Material Requirements Planning		MRP
WC	Working Capital		WC

Cash Conversion Cycle Asset Efficiency 51000 1 Cash Conversion, Cycle, Supply Chain, Inventory, Payables, Receivables The average period it takes a company to acquire and sell Inventory, collect Receivables and pay Payables; demonstrating the efficiency with which cash flows through the business