The cash conversion cycle formula
Inventory days = Average inventory ÷ Cost of goods sold × Days in period
Receivable (debtor) days = Average receivables ÷ Net credit sales × Days
Payable (creditor) days = Average payables ÷ Credit purchases × Days
Cash conversion cycle = Inventory days + Receivable days − Payable days
The cycle is also called the cash cycle or the net working capital cycle. The operating cycle is inventory days plus receivable days, before deducting supplier credit.
Worked example (illustrative figures)
A distributor's yearly figures: average stock ₹30 lakh, cost of goods sold ₹1.8 crore, average debtors ₹40 lakh, credit sales ₹2.4 crore, average creditors ₹20 lakh, credit purchases ₹1.8 crore. These are made-up numbers for learning, not a client case.
- Inventory days = 30 ÷ 180 × 365 ≈ 60.8 days
- Receivable days = 40 ÷ 240 × 365 ≈ 60.8 days
- Payable days = 20 ÷ 180 × 365 ≈ 40.6 days
- Cash conversion cycle ≈ 60.8 + 60.8 − 40.6 ≈ 81 days
In this example, about 81 days of operations must be funded from the owner's money, retained profit or a CC/OD limit. Shortening collections by 15 days would reduce that gap without new borrowing — which is why the working capital cycle matters as much as profit.
How to read your result
- Rising cycle: check whether customers are paying later, stock is building up, or suppliers are being paid faster.
- Falling cycle: check it is coming from better collections or stock movement — not from delaying suppliers beyond agreed terms.
- Growing sales: the same cycle on higher sales needs more working capital. Plan the funding before the growth.
Keep learning
- Cash flow management for MSMEs — the full guide this calculator belongs to
- Why every MSME must understand working capital
- Capital management: matching funds to their use
- Break-even calculator — the sales you need before profit starts
Frequently asked questions
What is the cash conversion cycle formula?
Cash Conversion Cycle = Inventory Days + Receivable Days − Payable Days. Inventory Days = Average Inventory ÷ Cost of Goods Sold × days in the period. Receivable Days = Average Receivables ÷ Net Credit Sales × days. Payable Days = Average Payables ÷ Credit Purchases × days.
What does the cash conversion cycle tell a business owner?
It estimates how many days money spent on stock and customer credit stays locked in the business before it returns as cash, after allowing for the credit suppliers give you. A longer cycle generally needs more working capital to fund it.
Can the cash conversion cycle be negative?
Yes. A negative cycle means customers pay you, on average, before you pay suppliers, so supplier credit funds part of operations. It is common in some trading and retail models, but it depends on supplier goodwill and is not automatically a sign of strength.
What is a good cash conversion cycle?
There is no universal good number. A manufacturer with long production times, a distributor giving market credit and a cash-sale retailer will have very different cycles. Track your own trend month by month and compare with businesses of a similar model.
Why use average balances instead of closing balances?
Closing balances can be distorted by a single large invoice or purchase at month-end. Averaging opening and closing figures (or monthly figures) gives a steadier picture. Either approach is acceptable if you use it consistently.
What if I can't separate credit sales from cash sales?
Use total sales and total purchases. The result will understate receivable and payable days somewhat if many transactions are in cash, so note the assumption and stay consistent over time.
How can an MSME reduce its cash conversion cycle?
Usually through three levers: collect from customers closer to agreed terms, reduce slow-moving and excess stock, and agree realistic supplier terms and pay on schedule. Each business needs to weigh these against customer relationships, service levels and supplier trust.
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