Meaning
Operational performance metrics track the time required to convert resource inputs into cash receipts. A working capital cash conversion analysis looks at the relationship between the days of inventory held and the days of receivables outstanding. This cycle determines how much external funding a business needs to support its daily operations.
It provides a view into the liquidity of the balance sheet.
Cycle Duration
Calculating the number of days between paying for raw materials and receiving payment from customers reveals the speed of the business. An improving working capital cash conversion rate indicates that the company is speeding up its production or collecting its debts faster.
Liquidity Efficiency
High growth companies often face a cash crunch because they must spend money on inventory long before they see a return. The working capital cash conversion metric highlights how much money is trapped in the supply chain at any given time.
Capital Requirement
Large gaps in the timing of cash flows require the use of revolving credit lines or other short term loans. A poor working capital cash conversion score increases the cost of doing business by raising interest expenses. Optimizing this cycle ensures that the firm can sustain its production rates without relying too heavily on outside investors.
