Cash conversion cycle is the total time that a manufacturing business takes to generate cash from raw material purchase to collection from finished goods sales. The formula to calculate the cash conversion cycle is as follows.
Cash Conversion Cycle = Inventory Days + Receivable Days – Payable Days
Inventory days = Time is taken to convert the raw materials into finished products
Receivable days = Time taken to collect cash from credit customers
Payable days = Time taken to pay suppliers
Example of the Cash Conversion Cycle:
Let us assume that Company ABC makes shoes. It purchases leather as raw materials from XYZ on credit and pays them after 18 days. The raw material is then converted into shoes within 10 days. The cash is collected from customers in 20 days after the sale. The cash conversion cycle will be as follows:
Cash Conversion Cycle = Inventory Days + Receivable Days – Payable Days
Cash Conversion Cycle = 10 days + 20 days – 18 days = 12 days
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