What is the purpose of calculating a cash cycle?

The cash cycle is a calculation of the amount of time a company's dollars are being used for production or sales purposes before being converted into cash. Just like the operating cycle, a short cash cycle is often indicative of success.

How is a cash cycle different from an operating cycle?

Below are two key differences between an operating cycle vs a cash cycle. The operating cycle measures the time it takes a business to convert inventory into cash, while the cash cycle takes into account that a business doesn't have to pay its suppliers back right away.

What are the components of a cash cycle?

We can break the cash cycle into three distinct parts: (1) DIO, (2) DSO, and (3) DPO. The first part, using days inventory outstanding, measures how long it will take the company to sell its inventory. The second part, using days sales outstanding, measures the amount of time it takes to collect cash from these sales.

How can the cash cycle be improved?

From a logistics point of view, one way to improve the cash cycle is by keeping the time a good stays in the warehouse down to a minimum. The extreme version of this is cross-docking, an order preparation method whereby the products are dispatched directly upon receipt, with no interim storage period.