Cash Cycle

Cash Cycle

See Also:
Days Sales Outstanding (DSO)
Days Payables Outstanding (DPO)
Daily Cash Flow Forecast
13 Week Cash Flow Report
How to Create Dynamic Cash Flow Projections
Days Inventory Outstanding (DIO)

Cash Cycle Definition

The cash cycle definition is the time it takes a company to turn raw materials into cash. It is also a common concept in any business which processes materials. Also known as the cash conversion cycle, it refers to the time between purchasing the raw materials used to make a product and collecting the money from selling the product. It also functions well as a measure of liquidity: how easily can unfinished product be turned into cash.

Find out if reducing your cash conversion cycle is worth the effort!

[button link=”” bg_color=”#eb6500″]Download The A/R Checklist[/button]

Cash Cycle Explanation

Cash cycles are typically measured in days. A shorter cash cycle is better than a longer cash cycle. A company with a shorter cash cycle has more working capital and less cash tied up in inventory and receivable accounts, which means it is less dependent on borrowed money. Cash cycle depends largely on operational efficiency. Factors that effect the cash cycle include labor efficiency, the quality of raw materials, quality of equipment, efficiency of management structures for processing materials, economic and market influencers, and more.

Cash Cycle Formula

Simply, the cash cycle calculation can be performed with:

Inventory to product conversion time + receivables collection time – Payables payment time

When measured in years the cash cycle equation is:

Average inventory / (cost of goods sold / 365) + Average AR / (Sales / 365) + Average AP / (COGS / 365)

Cash Cycle Example

For example, Ronald owns a custom gun smithing service. As a sole proprietor, Ronald has never paid much attention to creating financial statements as long he could pay his bills. Due to the recent change in national administration and economic state, he has had to change this view to accommodate increased demand for his services. Ronald is curious how long it takes him to convert materials to income. With this he will attempt to increase efficiency as well as production capacity. Studying his cash conversion cycle provides insight into his work processes as well as the liquidity of his business operations.
Ronald will begin by completing the process in a simple way. He begins keeping a pad close while he works to monitor how long it takes him to make a product.
Then, Ron looks in his quick books to find out the average amount of time it takes him to be paid. He has never been much of a collections agent but is still a little disturbed by how long it takes customers to pay. Ron puts his heart and soul into his work and feels he deserves better.
Finally, Ronald looks back to see how long it takes him to pay his suppliers. Ron has never pushed for credit terms and realizes that he has always paid vendors upfront.

Improve Your Cash Cycle

Ron finds a cash cycle template online to simplify his calculation. Ron’s eyes are opened from this experience. His method of doing business as a sole proprietor was satisfactory but Ron will have to make some changes to accept the success that he can freely receive. He knows he is ready for the change but considers hiring a business consultant to make sure he does the job right the first time. He takes a moment to think about the future and smiles; Ronald is ready for the challenge that awaits him.
For more ways to improve your cash cycle, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.
cash cycle, Cash Cycle Example, Cash Cycle Definition
[box]Strategic CFO Lab Member Extra
Access your Cash Flow Tune-Up Tool Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
cash cycle, Cash Cycle Example, Cash Cycle Definition


The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »


Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022



Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®


September 12-15th 2022