What is a cash conversion cycle?

It is sometimes referred to as a cycle of asset transfer or a net operating cycle, is a cash conversion cycle by a simple process that is used to evaluate the current financial stability of the company. In principle, the cash cycle looks at the time periods associated with several basic elements of business. Understanding cycles of cash conversion cycles can provide a concept of how long certain assets have been tied in the process of production, obligations and receivables and are therefore not available for use in investing in business operations.

It is useful to think of a cash conversion cycle as an identification of the number of days that insists on the acquisition of raw materials used to create products until the payment is received for the goods produced. This is compared with what is called the average period of shares. In essence, it is the final material at the end of the day and what would be the return if the raw materials were in full and the payment was received for goods that were made using the same ingredients.

It is clear that the shorter range of days is a sign of a positive cycle of cash conversion, because the investment is returned with profit in a shorter period of time. Since the return is accepted earlier than later, there is an opportunity to invest the collected net income and accumulate an even greater return. More return on investment means more income that can be used to expand production or benefit business in a different way.

Longer or negative cash cycles may indicate that there is a problem somewhere in the process. The problem with the cash conversion cycle may be in the area of ​​receivables if some customers take longer than paying for unpaid invoices for the delivered goods. If the company delays payment on RAW Materials until the customer pays, there may also be additional financial fees that reduce the total cost of raw materials. If a long cycle of cash conversion is indicated, there is an importantGreen to thoroughly analyze the situation, reveal what causes delay, and take steps to repair the situation.