Cash Conversion Cycle.docx - Cash Conversion Cycle Cash...

Cash Conversion Cycle
Cash conversion cycle is the number of days that a firm takes to convert the money invested in
inventory to cash i.e. the time taken from manufacture of good to final realization of cash from
accounts receivable.
Components of a Cash Conversion Cycle
Cash conversion cycle= Days of Sales Outstanding + Days of Inventory Outstanding - Days of
Payables Outstanding (DSO + DIO –DPO)
Days Sales outstanding (DSO) is the credit period allowed to customer who buy on credit. Days
Sales Outstanding = ( Average Accounts Receivable/ Net Credit Sales)×365
Days of Inventory outstanding (DIO) = It is the average period that the company holds stock of
inventory before it is sold off. Days of Inventory Outstanding= (Average Inventory/ Cost of Sales
or Sales)×365
Days of Payables outstanding (DPO) is the credit period allowed by suppliers to the firm to pay
off the credit purchases. Days of Payable Outstanding= (Average Payables/ Net Credit
Purchases)×365
A company can reduce its cash conversion cycle by reducing the days of inventory outstanding.