The Cash Conversion Cycle

The most liquid asset is cash in hand and cash at bank. The time required to complete the following cycle of events in case of a manufacturing firm is called the cash conversion cycle or the operating cycle.

• Conversion of cash into raw materials
• Conversion of raw materials into work in process
• Conversion of work in process into finished goods
• Conversion of finished goods into debtors and bills receivables through sales
• Conversion of debtors and bills receivables into cash

Operating cycle in case of a trading firm consists of following events

• Cash into inventories
• Inventories into accounts receivable
• Accounts receivable into cash

Service and financial firms has the operating cycle consisting of

• Conversion of cash into debtors
• Conversion of debtors into cash