What is a Cash Conversion Cycle?
Sometimes referred to as an asset conversion cycle or a net operating cycle, the cash conversion cycle is a simple process that is used to evaluation the current financial stability of a business. Essentially, the cash cycle looks at the time periods associated with several basic elements of doing business. Understanding cash conversion cycles can give a business some concept of how long certain assets are tied up in the production, payables and receivables process and are thus not available for use in making investments in the business operation. It is helpful to think of the cash conversion cycle as identifying the number of days it takes from the acquisition of the raw materials used to create products all the way through to the time that payment is received for the manufactured goods. This is compared to what is known as the average stockholding period. Essentially, this is the closing stock at the end of the day, and what the return would be if the raw materials were paid in full
