Cash conversion cycle
Principles of Finance glossary · Financial Statements, Markets & Working Capital
Definition
Days sales outstanding plus days inventory outstanding minus days payable outstanding.
Cash conversion cycle in plain English
This measures how many days a company's cash is "tied up" before it comes back as cash again. The idea: you buy inventory, wait to sell it, then wait for customers to pay — but meanwhile you can stretch out paying your own suppliers. So it's days to collect from customers + days to sell inventory - days you take to pay suppliers. Like running a lemonade stand where you buy lemons on credit, take a week to sell the lemonade, and customers pay you a few days later — the shorter this cycle, the less cash you have frozen and the healthier your business runs.
Learn these first
Practice Cash conversion cycle
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide