What is a Cash Conversion Cycle?

A business with a fast ‘cash conversion cycle’ can efficiently use funds and resources to fulfill the different needs of the business and to generate more business.

In the simplest terms, the ‘cash conversion cycle’ is an accounting and efficiency model which measures how fast a retailer can disburse cash to suppliers and then receive cash from customers. To be more descriptive, the business would use cash from Receivables, to get Inventory (and cover Payables), sell that Inventory, and Receive cash again.

To be sure, a faster cash cycle is not always better, as it can create inefficiencies elsewhere. But in general, a business is going to make more efficient use of its resources with a cycle that is faster rather than slower. It can be used together with cash flow statements for cash flow analysis, and to determine the viability of credit purchase and credit sale policies.