What is the cash conversion cycle?
The cash conversion cycle is the number of days it takes for cash spent on operations to come back as cash from customers. It measures how long money is locked up in the working-capital pipeline.
It connects three timing gaps into one number. How long inventory sits, how long customers take to pay, and how long you take to pay suppliers together decide how much cash the business needs to fund its own operations.
The formula.
Cash conversion cycle = days inventory outstanding plus days sales outstanding minus days payables outstanding. This tool calculates that, with a second mode for the cash conversion rate, free cash flow over EBITDA.
Each input is a timing measure in days. The first two add to the cycle because they delay cash coming in; the third subtracts because paying suppliers later keeps cash longer.
A worked example.
A business holds inventory 60 days, collects from customers in 45, and pays suppliers in 30. The cycle is 60 plus 45 minus 30, which is 75 days.
What is a good cash conversion cycle?
Lower is better, because a shorter cycle ties up less cash. The best outcome is a negative cycle, where you collect from customers before you pay suppliers, which is common in subscription and marketplace models that bill upfront.
A long cycle ties cash up in the balance sheet that could be elsewhere. Reading it next to the monthly burn behind it shows how the timing of cash feeds the overall burn.
How to improve it.
Collect from customers faster, hold less inventory, and negotiate longer payment terms with suppliers. Each lever shortens the cycle and frees up cash without raising any.
For software with upfront annual billing, the cycle is already favorable, and the lever shifts to acquisition cost: cash that is not spent re-buying demand stays in the business longer.