Cash operating cycle time is the amount of time it takes for a business to convert its investments in inventory into cash received from sales.

Primary Implication

A short cash operating cycle time indicates that the business is quick to convert sales to cash and, as a result, has lower working capital needs.

A longer cycle time means money is tied up in inventory or accounts receivable, preventing you from having more cash available to grow the business at a profit.

Overview

Cash Operating Cycle Time is a Liquidity Ratio that measures how quickly and efficiently a company can buy, sell, and collect on its inventory.  This calculation establishes the number of days it takes a company to receive a final cash payment from a customer to repay its initial cash outlay for inventory.  The Cash Conversion Cycle has three distinct stages:

1. The first stage represents the company’s current inventory and how long it will take to sell it. This stage is derived using the day’s inventory outstanding calculation.
2. The second stage represents the current sales and the time it takes to collect the cash from these sales. This number is derived using the day’s sales outstanding calculation.
3. The third stage is the current outstanding payables, representing the amount a company owes its current vendors for inventory and goods purchased, and when the company will need to pay off its vendors. This is calculated using the day’s payables outstanding calculation.

The formula for calculating the Cash Operating Cycle Time is the following:

Days Inventory Outstanding + A/R Days Outstanding – A/P Days Outstanding

A cash conversion cycle of 25 means it takes 25 days from paying for inventory to receiving the cash from its sale.

Shorter is Better: indicates the company is quick in converting sales to cash and, as a result, has lower working capital needs.

Longer is Worse:  this means that a company’s money is tied up in inventory longer, waiting for cash to be received.