What is Cash conversion cycle?

The formula

Cash conversion cycle = days of inventory + days to collect − days to pay

• Days of inventory (DIO): how long stock sits before it is sold. Average inventory ÷ cost of goods sold × number of days in the period.
• Days to collect (DSO): how long it takes to receive cash after a sale. Average receivables ÷ net revenue × number of days.
• Days to pay (DPO): how long you take to pay suppliers. Average trade payables ÷ cost of goods sold × number of days.

The result is the number of days each rupee spent on stock is out of your hands before it comes back as cash. The longer the cycle, the more working capital the business needs to grow.

What drives it for an Indian ecommerce seller

Inventory days depend on how much you buy at a time, how many SKUs and locations you stock, and how long imports take. Stock sitting in marketplace fulfilment centres counts too, and so does stock in transit.

Collection days depend on the channel:

• Marketplaces pay on a settlement cycle, usually a set number of days after an order is delivered or dispatched. Returns, reserves and disputed deductions can hold back part of the money for longer.
• Cash on delivery through a courier or shipping aggregator is remitted on the courier's remittance cycle, often with a fee for faster remittance.
• Prepaid website orders settle through the payment gateway within a few days.
• Quick-commerce and modern-trade buyers who buy on purchase orders usually pay on credit terms, so these sales can carry far more collection days than the other channels.

Payment days depend on what your suppliers allow. Stretching them has a limit: payments to suppliers registered as micro or small enterprises must be made within the time limit in the MSMED Act. Paying later makes you liable for interest under that Act, and can cost you the income-tax deduction for the purchase in that year. Importers often pay part or all of the price in advance, which pushes payment days close to zero or below.

How to shorten it

• Hold less stock per SKU by reordering more often in smaller lots, where suppliers allow it.
• Clear slow-moving SKUs instead of letting them sit.
• Shift sales towards channels that settle faster, and follow up on every marketplace deduction or reserve you do not agree with.
• Reconcile courier COD remittances every cycle so nothing is left uncollected.
• Agree longer credit with suppliers where the law allows, and pay MSME suppliers on time.

Reading the number

A shorter cycle frees cash, but compare like with like. A brand selling mainly through quick-commerce purchase orders will have a longer cycle than one selling prepaid on its own website. The trend over time, and the cycle for each channel, are usually more useful than a single figure for the whole business.