cash conversion cycle

Case Study The cash conversion cycle measures the length of time between when cash flows out to suppliers and when it is later replenished with payments from customers. A shorter time between cash outflows and inflows means less required financing and more profits. Businesses attempt to shorten the cash conversion cycle by speeding payments from customers and slowing payments to suppliers. This isn't always easy to accomplish, because most businesses are attempting to do the same thing. A firm's suppliers want to get paid more quickly at the same time its customers are attempting to pay more slowly. The perfect business is one in which cash comes in before it goes out. This “negative" cash conversion cycle is a major advantage of the business model developed by Internet bookseller Amazon. Although Amazon warehouses some of the books it sells, many titles are not ordered from publishers until orders are received from customers. Amazon charges customers' credit cards as soon as books are shipped and typically receives payment within two days. At the same time, the Internet bookseller doesn't pay publishers for, on average, nearly a month and a half. As the company states in its annual report: “We generally have payment terms with our vendors that extend beyond the amount of time necessary to collect proceeds from our customers." Thus, Amazon is able to pay its suppliers with its customers' money, and then only after having the funds available to help cover the firm's overhead for more than a month.