# Cash Conversion Cycle

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.

## Contents

### 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

IDNameLevelx
AEAsset Efficiency0AE
AE1Cash Conversion Cycle1AE1
AE11Days Receivables Outstanding2AE11
AE12Days of Inventory2AE12
AE13Days Payables Outstanding2AE13

### Process(es)

IDNameLevelx
PPlan1P
P1Plan Supply Chain Operations2P1
P2Plan Source2P2
P3Plan Make2P3
P4Plan Deliver2P4
SSource1S
S1Source-to-Replenish2S1
S2Source-to-Order2S2
S3Source-to-Engineering-Order2S3
S4Source Returns2S4
MMake1M
M1Make-to-Stock2M1
M2Make-to-Order2M2
M3Make-To-Engineering-Order2M3
M4Re-Make2M4
DDeliver1D
D1Deliver-From-Stock2D1
D2Deliver-to-Order2D2
D3Deliver-To-Engineering-Order2D3
D4Deliver Returns2D4

### Term(s)

IDNameClearx
APAccounts PayableAP
ARAccounts ReceivableAR
DRPDistribution Requirements PlanningDRP
DRP-IIDistribution Resource PlanningDRP-II
INVInventoryINV
MRP-IIManufacturing Resource PlanningMRP-II
MRPMaterial Requirements PlanningMRP
WCWorking CapitalWC
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