Reference Work Entry

Encyclopedia of Finance

pp 50-51

Cash Conversion Cycle

The cash conversion cycle is the net time interval between the actual cash outflow to pay accounts payable and the inflow of cash from the collection of accounts receivable.

The cash conversion cycle reflects the fact that some of the firm’s inventory purchases are not immediately associated with cash outflows. Rather, the timeline shows that the firm buys inventories and then pays for them at some later time. Therefore, the cash conversion cycle is the distance on the timeline between payment for inventories and collection of accounts receivable as:
where Operating cycle
A shorter cash conversion cycle makes a firm more liquid. This makes it an excellent tool by which to measure the overall liquidity of a firm. The cash conversion cycle helps the manager to model cash flow management decisions on a timeline to clearly show their effects. For example, if the firm introduces a new system to collect accounts receivable more quickly, the manager can compare the cash conversion cycles und ...
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