What does the cash conversion cycle measure?

The cash conversion cycle measures the time it takes for a company to convert its investments in inventory and accounts receivable back into cash. This metric is crucial for assessing how efficiently a company manages its working capital. It provides insights into how long a company funds its inventory before it is sold and how quickly it collects cash from customers after sales.

By analyzing the cash conversion cycle, businesses can identify opportunities to reduce the time it takes to move through each stage of the cycle, such as speeding up inventory turnover or improving the accounts receivable collection process. This efficiency can directly impact a company’s liquidity and cash flow, which are vital for maintaining operations, investing in growth, and meeting financial obligations.

The focus is specifically on the relationship between inventory, receivables, and cash, making this metric a key component of treasury and financial management. In contrast, other options address aspects that are not related to the cycle of cash conversion in the context of working capital management.