Cash Conversion Cycle

Story type: Situational

Three working capital signals describe the cash conversion cycle: DSO trend indicates collection patterns, inventory turnover shows how long goods sit, and payables turnover reveals payment timing. Together these map the full working capital cycle.

Explanation

Each signal represents an independent observation about working capital timing: DSO Trend measures the direction of days sales outstanding—how long it takes to collect from customers. Rising DSO indicates slower collection; falling indicates faster. Inventory Turnover measures how quickly inventory cycles through the business. Faster turnover means less time between purchasing and selling goods. Payables Turnover measures how quickly the company pays suppliers. Slower turnover means the company retains cash longer before paying. When observed together, they describe the complete cash conversion cycle—how long cash is tied up in operations from supplier payment to customer collection.

Interpretation

This story identifies cash conversion characteristics, not operational quality. It does not predict cash flow, assess relationship quality, or indicate optimal cycle length. Retailers often have negative cycles; manufacturers often have long positive cycles.

Required Signals

• dso-trend

  Change in days sales outstanding over the measurement period

• inventory-turnover

  Ratio of cost of goods sold to inventory

• payables-turnover

  Ratio of cost of goods sold to accounts payable

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