What is a cash to cash cycle?
submitted by Jaws

Reba Flattentire

It's how long it takes for a business to go from spending money on things like inventory to actually getting paid by customers. A short cash to cash cycle means the company probably won't have to borrow money to hold them over while they make sales.

just_ugh

That's the measure of how long a company takes to convert its inventory and other resources into cash flows from sales.

The cycle is paying for raw materials then selling those materials. Shorter cycles mean better liquidity. It's a good indicator that the company is pretty efficient.

zilla

Different industries tend to have different cycle lengths. A grocery stores, for example, will have a short cycle because products are moving off the shelves throughout every day. Heavy machinery, luxury goods, or other high ticket items will have longer cycles because sales are less frequent.

So you can't really compare one company to the next if they're in different industries. You'd have to look at comparable business types to see if there's room for improvement.

faceman

Using the groceries example, if you look at a grocery store, they buy and sell all the time. They're constantly getting trucks full of bread, produce, etc. coming in, and they don't stay on the shelves long. Their cash cycle might be a couple weeks. Compared to, say, a car dealership, that's quite speedy. They might have cars on the lot for months.

Long cash cycles are tough to work with, because if you need cash for some type of investment in the business, like new inventory, it's sort of locked up in the current inventory until it's sold. Companies like this run the risk of having to borrow money to get things done.

A short cash cycle doesn't necessarily imply the business is better than one with a long cycle. A lemonade stand won't turn an impressive profit, even though they move inventory quickly. However, if you sell one restored vehicle every 6 months, you could have a huge profit, despite a slow turnaround time.