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It is referred to “net” because it is a subtraction of the number of days of accounts payables the business has outstanding from the operating cycle.

This cycle is also known as the cash cycle or net operating cycle.

The cash conversion cycle involves the process where the business buys stock or inventory, sells that inventory on credit and the collects payments from customers who bought on credit. The cash conversion cycle is an accounting metric that measures the time it takes for a business to convert its stock or inventory into cash flows from sales. The cash conversion cycle is an important metric that every business owner should understand. A low cash conversion cycle is considered as more acceptable and desirable, although this depends on the nature of the business, its industry, and capabilities. A higher cash conversion cycle is a sign of a slower process. The cash conversion cycle time is dependent on how a business finances the purchase of its inventory, how the business allows its customers to pay (credit terms and collection period), and how long it takes the business to collect money from those sales.Ī lower cash conversion cycle average indicates a faster inventory-to-sales process for any business. This metric is usually measured in days and is an important indicator of the financial health of a business. The cycle is a combination of several averages that include accounts receivable, accounts payable and inventory turnover. Simply stated, the cash conversion cycle measures the number of days it takes a business to collect its accounts receivables from customers who bought on credit and how long it takes the business to pays its bills or accounts payables to its suppliers. On the other hand, accounts receivables, or cash the business is yet to receive, decreases the cash or working capital available to the business to finance operations. The rationale behind this is that accounts payables are viewed as a source of working capital or cash for operations for the business. The Cash Conversion Cycle (CCC) is also known as the cash cycle or net operating cycle.