Cash Conversion Cycle

The number of days between paying for inventory and receiving cash from customers. Shorter cycles mean the business generates cash faster relative to how much it ties up in stock.

A long cash conversion cycle creates working capital pressure. You may be profitable on paper but cash poor in reality if money is always tied up in inventory. The best businesses have near zero or negative cash conversion cycles.

You pay your supplier on day 1. Goods arrive on day 40. You sell them over 30 days and customers pay immediately. Cash conversion cycle is roughly 40 days. If you could negotiate 60 day supplier payment terms, you collect customer cash before paying your supplier.