Cash conversion cycle
|
|
Cash conversion cycle, also known as asset conversion cycle, net operating cycle or just cash cycle, is a ratio used in the financial analysis of a business. The higher the number, the longer a firm's money is tied up in operations of the business and unavailable for other activities such as investing. The cash conversion cycle is the number of days between purchasing raw materials and receiving the cash from the sale of the goods made from that raw material.
Cash Conversion Cycle = Average Stockholding Period (in days) + Average Receivables Processing Period (in days) – Average Payables Processing Period (in days)
with
Average Stockholding Period (in days) = Closing Stock / Average Daily Purchases.
Average Receivables Processing Period (in days) = Accounts Receivables / Average Daily Credit Sales.
Average Payable Processing Period (in days) = Accounts Payables / Average Daily Credit Purchases.
Missing image
Cash_Cycle.jpg
Image:Cash_Cycle.jpg