Let’s take a look at a real example – a wholesaler.
The wholesaler buys stock from suppliers, and on average, must pay the suppliers 45 days after buying the stock.
The stock doesn’t sell the moment it comes into the warehouse. Some stock sells quickly, other stock takes longer and eventually, some stock has to be discounted to get it to move at all. On average, stock is held for 60 days.
When the stock is sold, credit terms are provided to customers, but a number of customers are not observing those credit terms. On average it takes 60 days for customers to pay.
So, now we can calculate the Cash Conversion Cycle – 60 days average stockholding plus 60 days to get paid by customers less 45 days credit provided by suppliers equals 75 days to convert inputs to cash. Any way you look at it, this is a long period of time!