What is the difference?

# Inventory Turnover vs Cash-to-Cash Cycle Time

Inventory Turnover

Cash Conversion Cycle

#### What is it?

Inventory Turnover measures how often, in a given time-period, your organization is able to sell its entire inventory. Inventory Turnover is an important efficiency metric and is helpful in analyzing pricing, product demand, and, of course, inventory purchase and costs. It is also a critical tool when selling perishable goods, where the potential for waste is high.

The Cash Conversion Cycle, also knows as Cash-to-Cash Cycle Time, is the time between when a business pays its suppliers and when the business receives payment from its customers, usually expressed in days. Keeping active tabs on your Cash Conversion Cycle will aid you in monitoring your finances as cash flows in and out of your business.

#### Example

If a clothing retailer generates \$1M in sales each month, with \$400K in Costs of Goods Sold (COGS), and the start of the month inventory was valued at \$45K and closed at \$55K; Using the Sales method, Inventory Turnover = \$1M / (( \$45K + \$55K ) / 2 ) = 20X per month Using the COGS method, Inventory Turnover = \$400 / (( \$45K + \$55K ) / 2 ) = 8X per month

It takes a widget manufacturer an average of 60 days to sell its inventory, and then having sold their widgets, takes them an additional 30 days to collect cash. In general the manufacturer pays its suppliers in 75 days. Cash-to-Cash Cycle Time = 60 Days Inventory Outstanding + 30 Days Sales Outstanding - 75 Days Payables Outstanding = 15 days. Note: Calculations for the components: DIO = Average Inventory / COGS X 365 (if values are annual) DSO = Average Accounts Receivable / Revenue Per Day DPO = Average Accounts Payable / COGS Per Day

#### Published and updated dates

Date created: Oct 12, 2022

Latest update: Oct 12, 2022

Date created: Oct 12, 2022

Latest update: Oct 12, 2022