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Cash cycle definition

Description

Cash conversion cycle measures the number of days, needed to sell company’s stocks, to collect receivables from customers and pay out short term debts to its’ suppliers (and other short term creditors). In general, this measure indicates the time that is required to turn purchases into money, collected from customers. Data to calculate this ratio is collected from balance sheet and income statement.

This complex ratio is very important for company’s owners, as it indicates the efficiency of management performance dealing with sales, stocks, short term debts and amount receivables as these activities are the background of business.

Norms and limitations

There are no general norms for this ratio, but it is worth to mention that the lower this ratio is, the better it is for the company.

It is recommended to compare this ratio with ratios of companies working within the same industry.

Formula

DIO represents days inventory outstanding, DSO, days sales outstanding DPO and days payable outstanding.

You can easily calculate DIO, DSO and DPO following the links to its’ original calculators.