Cash conversion cycle measures the total time a business takes to convert its cash on hand to produce, pay its suppliers, sell to its customers and collect cash from its customers. The process starts with purchasing of raw materials from suppliers, converting them into finished goods, paying suppliers, selling goods to customers and eventually collecting cash from customers.
Cash conversion cycle is calculated by adding average inventory conversion period and average collection period and subtracting average payment period. The formula is
Cash conversion cycle = Inventory conversion period + Average collection period – Average payment period
The positive cash conversion cycle means that the business has to pay its suppliers before it collects cash from its customers. The positive cash conversion cycle should be as low as possible.
The negative cash conversion cycle means that the business collects cash earlier from its customers than the time its supplier payments are due. The negative cash conversion cycle should be as high as possible.
Cash conversion cycle example
Calculate the Cash Conversion Cycle from the following data
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