Cash flow is fundamental to any business, but understanding where your money goes (and how long it takes to come back) is just as important as making the sale. Implementing and calculating the cash-to-cash cycle reveals exactly that.
By measuring the time between paying for raw materials and receiving payment for finished goods, this key KPI provides a clear view of operational efficiency and financial health. It’s also a crucial piece of logistics network optimization, helping brands reduce waste, improve inventory turnover, and streamline decision-making across the supply chain.
In this guide, we’ll break down how the cash-to-cash cycle works, how to calculate it, and what businesses can do to improve it.
What Is Cash-to-Cash Cycle Time?
Cash-to-cash cycle is a key supply chain KPI that tracks the time between paying for raw materials and receiving payment for finished goods.
The cash-to-cash cycle time tells a brand how quickly they can turn their resources into cash, and the shorter the cycle, the better. Tracking this metric will help brands optimize cash flow management in the right areas to ensure less cash is tied up in operations.
Also referred to as the cash conversion cycle, net operating cycle, or cash cycle, this metric combines several KPIs across the supply chain, including both inbound logistics and outbound logistics KPIs.
Importance of Cash-To-Cash Cycle Time in Business
A short cash-to-cash cycle time is a strong indicator of operational efficiency. It means a business is moving inventory quickly, generating sales faster, and tying up less capital in day-to-day operations. Like the inventory-to-sales ratio, this metric helps reveal how lean and responsive a brand’s supply chain really is.
Timing is also critical when thinking about the cash-to-cash cycle. Brands often accrue inventory on credit (accounts payable) and sell products on credit (accounts receivable). The cash-to-cash cycle isn’t complete until both of these are settled, which means extended payment terms (on either end) can lengthen the cycle.
Beyond inventory turnover and sales velocity, this KPI also highlights how efficiently a business manages its payables and receivables. By tracking the full duration of the cycle, brands gain clearer insight into their overall cash flow and operational health.
Generally, brands should aim for a short cash-to-cash cycle. That means that the time between the initial investment (purchasing inventory) and the final returns (sales revenue) is short.
Components of Cash-to-Cash Cycle Time
The cash-to-cash cycle is made up of three components across the cash conversion cycle: days of inventory outstanding (DIO), days sales outstanding (DSO), and days payable outstanding (DPO).
Days Inventory Outstanding (DIO):
The days inventory outstanding (DIO) metric measures how long it will take for a brand to sell its inventory. A lower DIO is better because it indicates a low turnover time for inventory.
To calculate DIO, brands need to divide the average inventory by the cost of goods sold (COGS) for a specific period (usually a calendar year or 365 days). To calculate average inventory, take the sum of the beginning inventory and ending inventory, then divide by 2:
Here’s the resulting formula for DIO:
Average Inventory / Cost Of Goods Sold (COGS) × Number Of Days In The Period = DIO
Days Sales Outstanding (DSO)
The days sales outstanding (DSO) metric measures how long it takes a brand to collect cash generated from sales. A lower DSO is also better because it means that the brand can collect cash in a short time.
To calculate DSO, divide the average accounts receivable by revenue per day.
Average Accounts Receivable/Revenue per Day = DSO
Days Payables Outstanding (DPO):
Days payables outstanding (DPO) measures how long, on average, it takes a brand to pay its suppliers for inventory and goods.
Unlike DIO and DSO, a higher DPO is generally better from a cash flow perspective, as it means the company can retain cash longer before paying its obligations—potentially freeing up capital for other investments.
This extended payment window contributes to a favourable working capital cycle, which is reflected in a company’s financial statements.
Average Accounts Payable/COGS per Day = DPO
How to Calculate Cash-To-Cash Cycle Time
Since the cash-to-cash cycle includes three different components, you will need to calculate days of inventory outstanding (DIO), days sales outstanding (DSO), and days payables outstanding (DPO) first.
Formula for Calculating Cash-To-Cash Cycle Time
The cash-to-cash cycle formula is as follows:
Cash-To-Cash Cycle = DIO + DSO – DPO
Example Calculation of Cash-To-Cash Cycle Time
Let’s look at an example of a brand that sells beauty products. Let’s say the brand’s DIO is 41, DSO is 33, and DPO is 32.
Cash-To-Cash Cycle Example: 41 + 33 – 32 = 42
The cash-to-cash cycle for that business is 42. That means it takes that brand 42 days from paying for raw materials and getting paid for the beauty products it sells.
How to Improve Cash-To-Cash Cycle Time
There are several ways brands can shorten their cash-to-cash cycle, especially by optimizing inventory and streamlining operations.
A quick inventory turnover rate is key. Holding unsold stock ties up capital and increases storage costs. Brands should aim to carry enough inventory to meet demand, but not so much that it becomes a liability.
Tools like Flowspace support this balance by offering real-time inventory tracking and seamless integration with inventory management systems.
Additionally, auditing your operations can uncover inefficiencies that slow the cycle. For example, leveraging Flowspace’s fulfillment network can reduce delivery times and move orders faster, ultimately helping you convert inventory into cash more quickly and improve customer satisfaction.
Benefits of Improving Cash-To-Cash Cycle Time
A faster cash-to-cash cycle time means brands can turn cash into products and back into cash on a faster timeline, which means more money available to invest in the business and grow.
A faster cash-to-cash cycle time also often means a brand is running leaner, which means fewer dollars are tied up in unfinished merchandise, also called work–in–progress inventory, and other forms of inventory that can’t be sold.
Optimize Supply Chain Operations With Flowspace
Flowspace helps brands streamline their supply chain with tools to help improve key performance metrics like the cash-to-cash cycle. Tap into the OmniFlow Visibility Suite to gain real-time insights, enabling merchants to monitor performance and make data-backed decisions.
Beyond tracking KPIs, our fulfillment software also offers actionable recommendations to accelerate cash conversion by expediting order fulfillment at scale and reducing inventory holding times. With full visibility from order to delivery, you can maintain optimal stock levels, prevent delays, and improve customer satisfaction.
Ready to optimize your supply chain? Connect with Flowspace today and see how our platform can support your operational goals.
Written By:
