Inventory glossary

What is Cash conversion cycle?

Cash conversion cycle is the number of days between paying a supplier for stock and collecting cash from selling it.

Cash conversion cycle shows how long cash is locked up in stock before it turns back into money. For a small Shopify store, a long cycle means cash is stuck on shelves instead of being available to pay bills, order more stock, or cover slow months.

To use it, track how many days stock sits before selling, how fast customers pay, and how fast you pay suppliers. Shortening any part of this, especially by not overbuying stock, frees up cash sooner.

Formula

Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Days payable outstanding

Example

A candle store holds inventory for 60 days on average, collects cash from customers immediately since it sells online, and pays its supplier in 20 days. Days inventory outstanding is 60, days sales outstanding is 0, days payable outstanding is 20. Cash conversion cycle equals 60 + 0 - 20, which is 40 days.

Common mistakes

  • Ignoring supplier payment terms and only looking at inventory days.
  • Using average inventory value instead of average daily cost of goods sold in the calculation.
  • Treating a negative cash conversion cycle as impossible, when fast-paying customers and slow-paying suppliers can make it happen.

Cash conversion cycle and SteadyShelf

Ordering the right quantities instead of overstocking shortens days inventory outstanding, and SteadyShelf's forecasts and order-by dates help you buy closer to actual demand so cash is not sitting on a shelf.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Days inventory outstanding · Working capital · Inventory turnover · Net 30 payment terms · Carrying cost

Full inventory glossary

FAQ

What does a shorter cash conversion cycle mean for a small store?

A store with a 20 day cash conversion cycle gets its money back faster than one with a 90 day cycle, even if both have the same sales. Lower is generally better because cash is tied up for less time.

Can negotiating supplier payment terms improve the cash conversion cycle?

Yes. If a supplier gives 30 days to pay instead of requiring payment on delivery, payables days go up, which lowers the cash conversion cycle.

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