Example Cash Conversion Cycle Calculation
Imagine a business has net sales of $75,000 for the fiscal year. During that time, customers return $5,000 in merchandise. The business purchases the goods it sells for $15,500, and it has an average inventory of $1,400, an average accounts receivable of $15,000, and an average accounts payable of $4,000. The calculation of each component of the cash conversion cycle is as follows:
- Days inventory outstanding: $1,400 / ($15,000 / 365) = 32.97
- Days of sales outstanding: $15,000 / (($75,000 – $5,000) / 365) = 78.21
- Days payable outstanding: $4,000 / ($15,500 / 365) = 94.19
Using the formula above, you figure the cash conversion cycle like: 32.97 + 78.21 – 94.19 = 16.99. This calculation means it takes the company about 17 days to pay for its inventory, sell it, and receive the cash from the sale. By knowing this approximate time table, the business can make more accurate cash flow projections.
Knowing how to calculate your business cash conversion cycle can help you get a better handle on your cash flow while keeping your warehouse or storage space well stocked.
Also, by knowing how each component of the calculation works, you can better improve your business’s internal processes for optimal efficiency and profit. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.