Chapter 10 · Day 10 — Efficiency and the cash conversion cycle
Turnover ratios and the cash conversion cycle
How many days pass between paying for inventory and collecting from the customer — and why that number is a financing cost.
11 of 30 · 12 min
Efficiency ratios ask how hard the assets are working, and how long cash is tied up on the way round.
| Ratio | Formula |
|---|---|
| Asset turnover | Revenue ÷ Average total assets |
| Inventory turnover | COGS ÷ Average inventory |
| Receivable turnover | Credit sales ÷ Average receivables |
| DSO (days sales outstanding) | Average receivables ÷ Revenue × 365 |
| Inventory days | Average inventory ÷ COGS × 365 |
| DPO (days payable outstanding) | Average payables ÷ COGS × 365 |
The cycle
Cash Conversion Cycle = DSO + Inventory days − DPO.
| Component | Illustrative | Days |
|---|---|---|
| Average receivables Rs 16,400k on revenue Rs 1,20,000k | 16,400 ÷ 1,20,000 × 365 | 50 |
| Average inventory Rs 17,600k on COGS Rs 74,400k | 17,600 ÷ 74,400 × 365 | 86 |
| Average payables Rs 12,200k on COGS Rs 74,400k | 12,200 ÷ 74,400 × 365 | 60 |
| **Cash conversion cycle** | 50 + 86 − 60 | **76 days** |
For 76 days the company has paid for goods it has not yet been paid for. That gap has to be financed — by its own cash or by borrowing. Shortening the cycle releases cash without selling a single extra unit.
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