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Cash conversion cycle is a term given to the period of time that a project takes from the disbursement of cash to purchase raw materials and services to collecting cash from sales resulting from these raw materials and services. It is used as a standard for measuring the project's efficiency in managing liquidity and for determining its cash needs to finance its operations. The longer the cash transfer cycle, the more the project needs more capital, and the less the need for the capital invested in the project, the less. A project can also achieve a cash transfer cycle of less than zero, for projects that receive sales in cash before spending the value of raw materials and services needed for them.
For example, the average sale of inventory is 30 days, the average collection of sales is 60 days, the average payment for suppliers is 45 days, and the formula becomes as follows:
Cash Cycle = Average Inventory + Average Sales - Average supplier repayment
Cash cycle = 30 + 60-45
Cash cycle = 45
This means that we need to secure cash liquidity for a period of 45 days in order to complete the cycle or we raise the average suppliers or reduce the sale time and stock time
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