Efficiency ratios interactive picture: inventory, debtors and creditors turnover and the cash cycle

Faster stock turnover, shorter cash cycle

The cash cycle is inventory days plus debtor days, less the days the business takes to pay its creditors. Shorten the inventory turnover period and watch the cash cycle and the cost of holding stock fall. The picture shows the timing side only: cut stock too far and the business risks running out and losing sales.

Turnover period
45 DAYS
Example business: cost of sales $365,000 a year, holding cost 10% of stock a year
CASH CYCLE: 33 DAYS
Inventory turnover period (days)
15 52.5 90
Inventory days · times a year
45 d · 8.1×
Holding cost a year
$4,500
Know This
Inventory Turnover Period equals Average Inventory divided by Cost of Sales times 365, revealing how many days stock sits unsold before conversion to cash or receivables.
Debtors Turnover Period equals Average Debtors divided by Credit Sales times 365, indicating how quickly customers pay their invoices. A 30-day period means the business collects receivables monthly on average. Expressed as a times ratio instead, that is 365 ÷ 30 ≈ 12.2 times a year (credit sales ÷ average debtors), the form called the accounts receivable turnover ratio. Lower values suggest strong credit control and faster cash conversion, but overly aggressive collection can damage customer relationships. The ideal balance depends on industry norms and competitive positioning. Extending credit strategically can increase sales volume while maintaining acceptable risk levels.