The order-to-cash cycle fits within the cash conversion cycle. In the below image, the cash conversion cycle dates from the sale (item 5); to the issuance of an invoice for the sale and the recording of an account receivable (item 6); to the collection of the account receivable and the resulting conversion of the receivable to cash (item 1).

The order-to-cash cycle is nested within the cash conversion cycle, which begins when the company buys raw material inventory and adds value to it in the production process. During this stage of the process, the company will have to pay its suppliers (vendors from whom the company bought raw material inventory) and its employees (whose labor added value in the process of converting raw material inventory to work-in-process inventory to finished goods inventory).

This article (Links to an external site.) has a video that illustrates this well. (I'd embed the video, but there is no embed code available.)

The idea is that:

• the slower you can pay your suppliers; and
• the faster that you can convert raw materials inventory to finished goods inventory; and
• the faster you can collect receivables;

the less your need for financial capital (i.e., debt and equity capital). The less financial capital investment you need, the higher your rate of return on invested capital.

Of course, these variables behave not according to your wish but rather according to market discipline, as follows:

• Vendors won't ship goods to you if you pay too slowly, and employees won't work without timely pay;
• There is a limit to how fast your production process can operate; and
• Customers who can buy from your competitors will refuse to pay you as fast as you might wish they would.

For this thread, please answer the three questions that are asked in the following document:

Order to Cash discussion thread.docx

discussion