cash management and cash conversion cycle

Operating and cash cycle

Inventory period

Time from acquiring inventory until selling it.

Receivables period

Time from selling the product until collecting cash

Operating cycle

Inventory Period+Receivables Period

Interpretation

How long from acquiring inventory until collecting cash from the customer?

Cash conversion

• Many firms must pay suppliers before they collect cash from customers

• The cash conversion measures the timing gap

Cash management

Is about managing and financing the timings of cash inflows and cash outflows

• The objective is not necessarily to minimise the cash cycle—it is to manage it efficiently

Longer cash cycle

• More money tied up in working capital

• Greater need for ST financing

• Higher financing cost/liquidity risk

Shorter cash cycle

• Too little inventory → stockouts.

• Pressuring customers to pay faster → may reduce sales.

• Delaying suppliers too much → damages relationships or loses discounts.