Plain definition
The cash conversion cycle estimates how long cash remains tied up in inventory and customer balances after allowing for supplier credit.
Cash conversion cycle = inventory days + customer collection days − supplier payment days
The measure is most useful for businesses that carry inventory, sell on credit, and receive payment terms from suppliers.
Worked example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A company holds inventory for 45 days.
It collects customer balances in 40 days and pays suppliers in 30 days.
| Inventory days | |
|---|---|
| Customer collection days | |
| Supplier payment days | |
| Cash conversion cycle |
A 55-day cycle is a timing measure.
It does not mean the company needs or any other fixed cash amount.
Why it matters
The cash requirement depends on more than the number of days.
Scale, growth, margins, inventory policy, and payment terms all affect the funding need.
Two companies can have the same cycle and very different cash requirements.
The metric identifies where to investigate; it does not replace a cash forecast.
Practical consequence
Track inventory days, customer collection days, and supplier payment days separately.
Assign an owner to each component and review the trend.
There is no universal target of zero days. Interpret the cycle within the company’s business model.
Do not shorten the cycle by damaging supplier relationships. Translate changes in days into forecast cash balances before acting.
Try your own numbers
Measure cash tied up in receivables and inventory, less supplier credit, then test a target cycle.
Working-capital cycle