What is Cash Conversion Cycle and how to calculate?

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What is the aim of studying cash conversion cycle and its calculation?
Posted by:
Nadia Ahmed Mohammed Saeed
26-August-2013

Budgeting Financial Analysis

Question ajoutée par Ahmed Abd Alwahab Awad Ibrahim , Chief Accounting , ICCDP
Date de publication: 2014/07/30

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par Fahad Hamid , Finance Manager , SNASCO Holding Group

Cash conversion cycle is the number of days it takes a company to convert its investment in inventory to cash. In short, it is a combination of following ratios:

Inventory turnover in days (ITO)
Receivables turnover in days (RTO)
Payables turnover in days (PTO)

Formula for calculation is ITO+RTO-PTO. This should always be used in conjuction with in dept analysis of all the ratios involved as there is a possibility that a conversion cycle can give a distorted view due to extra ordinary fluctuation in any of the ratios.

Hope this answers your query.

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