Inventory Turnover vs Cash-to-Cash Cycle Time
Inventory Turnover measures how efficiently a company sells through its inventory over a period, typically calculated as cost of goods sold divided by average inventory. It reveals how many times inventory is sold and replaced within a specific timeframe. Cash-to-Cash Cycle Time, however, takes a broader view by measuring the total time between when a company pays for raw materials and when it collects payment from customers. This comprehensive metric includes Days Inventory Outstanding, Days Sales Outstanding, and Days Payable Outstanding, effectively showing how long cash is tied up in the entire operational process. While Inventory Turnover focuses specifically on stock movement efficiency, Cash-to-Cash Cycle examines the entire cash flow timeline across procurement, production, sales, and collection.
A retail clothing company might prioritize Inventory Turnover when evaluating seasonal merchandise performance, helping them identify which styles move quickly and which remain as deadstock. By contrast, a manufacturer with long production cycles would benefit more from monitoring Cash-to-Cash Cycle Time, especially when navigating supplier payment terms and customer credit arrangements. For example, if the manufacturer pays suppliers within 30 days but customers typically pay invoices in 60 days, understanding this cash flow gap becomes crucial for financial planning—something Inventory Turnover alone wouldn't reveal. The Cash-to-Cash metric provides a holistic view of working capital efficiency, while Inventory Turnover offers deeper insight into specific inventory management effectiveness.
Inventory Turnover
Cash Conversion Cycle
What is it?
Inventory Turnover measures how often, in a given time-period, your organization is able to sell its entire inventory. Inventory Turnover is an important efficiency metric and is helpful in analyzing pricing, product demand, and, of course, inventory purchase and costs. It is also a critical tool when selling perishable goods, where the potential for waste is high.
The Cash Conversion Cycle, also knows as Cash-to-Cash Cycle Time, is the time between when a business pays its suppliers and when the business receives payment from its customers, usually expressed in days. Keeping active tabs on your Cash Conversion Cycle will aid you in monitoring your finances as cash flows in and out of your business.
Who is it for?
Categories
Formula
Example
If a clothing retailer generates $1M in sales each month, with $400K in Costs of Goods Sold (COGS), and the start of the month inventory was valued at $45K and closed at $55K; Using the Sales method, Inventory Turnover = $1M / (( $45K + $55K ) / 2 ) = 20X per month Using the COGS method, Inventory Turnover = $400 / (( $45K + $55K ) / 2 ) = 8X per month
It takes a widget manufacturer an average of 60 days to sell its inventory, and then having sold their widgets, takes them an additional 30 days to collect cash. In general the manufacturer pays its suppliers in 75 days. Cash-to-Cash Cycle Time = 60 Days Inventory Outstanding + 30 Days Sales Outstanding - 75 Days Payables Outstanding = 15 days. Note: Calculations for the components: DIO = Average Inventory / COGS X 365 (if values are annual) DSO = Average Accounts Receivable / Revenue Per Day DPO = Average Accounts Payable / COGS Per Day
Published and updated dates
Date created: Oct 12, 2022
Latest update: May 9, 2025
Date created: Oct 12, 2022
Latest update: May 2, 2025