How many days is your money tied up?

What is the cash conversion cycle?

The cash conversion cycle is the number of days between the money a business pays its supplier and that money coming back as a collection from the customer. It has three components:

• Collection period: How many days on average it takes to collect cash after a sale
• Inventory period: How many days on average goods sit in the warehouse
• Payment period: How many days on average it takes to pay the supplier

The formula is simple: collection period + inventory period − payment period. The shorter the result, the less your money is tied up.

The zero line

If the cash conversion cycle is below zero, your supplier is financing you: by the time you have sold the goods and collected the money, you haven't paid the supplier yet. If it is above zero, you finance the gap yourself, with your own cash or with credit.

READERP shows the cycle as a line over time. When the line crosses zero is often more important than how many days it is, because it marks the moment the business's financing needs changed.

Which end is getting longer?

READERP's cash conversion cycle report doesn't give you a single number; it shows four ratios together: the cycle itself and its three components, each with its change from the previous period. So "the cycle got 12 days longer" is followed by "because inventory days rose by 9." It becomes clear which team should look at what:

• If collection is getting longer: receivables aging
• If inventory is getting longer: stock analysis
• If payment is getting shorter: supplier payment terms

Same ledger, same window

If these three periods are pulled from different reports, errors creep in: one counts by entry date, another by due date, and the difference loses its meaning. READERP reads all three from the same ledger over the same time window. That way the ratios are genuinely comparable with each other.

A caution: long payment terms aren't always a win

If most of your payables are concentrated with a single supplier, long payment terms aren't a negotiating success but a dependency. When that supplier changes its terms, the cycle lengthens overnight. READERP states this clearly next to the ratio; it doesn't editorialize, but it doesn't let it slip by unnoticed either.

Together with the cash plan

The cash conversion cycle explains the background of the cash projection. The projection answers "what do the coming weeks bring?"; the cash conversion cycle answers "why is it like this?" To see long-term change, thanks to fiscal-period merging the cycle can be tracked across years in a single chart.

Frequently asked questions

To see where your money is tied up, talk to us. General information: READERP · ERP reporting.