Question

Discuss the circumstances when the cash cycle of a company is positive and when the cash cycle is negative.

Answer 1

The cash conversion cycle (CCC) measures the time between the cash outflow and the cash inflow of the company.

Days in the cash cycle is the cash conversion cycle and can be calculated in following manner -

Cash cycle = Days Inventory Outstanding + Days Receivables Outstanding – Days Payable Outstanding

If a company requires more time to sell its inventory and receive cash from its customers in comparison to time requires paying its suppliers; then the cash cycle of the company will be positive.

If the company requires less time to sell its inventory and receive cash from its customers in comparison to time requires paying its supplier; then the cash cycle of the company will be negative.