3.1.5.4. Example Cash Conversion Cycle
To show how the elements of the cash conversion cycle come together, let’s look at the actual figures for a publicly traded company that operates a chain of natural foods supermarkets for a recent 12-month period. The numbers in the example are taken from the company’s balance statements and income statements.
Since these figures are in thousands, we’ll keep them that way for now to avoid having to track the extra zeros.
Recall that the cash conversion cycle equals:
days inventory outstanding + days sales outstanding – days payable outstanding
To determine the company’s cash conversion cycle, we’ll first need to calculate each component of the equation.
Starting with days inventory outstanding, the average inventory for the year is 317,044.5 ((323,487 + 310,602) / 2). The cost of goods sold is 5,870,393. The inventory turnover ratio is thus