Meaning and formula
The cash conversion cycle links average inventory days and collection days with supplier payment days. In a common model, the first two intervals are added and the third is subtracted. This is an analytical approximation, not an exact contractual calendar. IAS 2 and IAS 7 provide a basis for understanding inventory and the cash consequences of accruals, but they do not establish one mandatory cycle formula. Sources: **curr-stat-ias2**, About; **curr-stat-ias7**, About.
Interpreting a long or negative cycle
A long cycle may require financing as sales grow. A negative cycle may be associated with customer prepayments or extended supplier payment terms, but it does not eliminate the risk that conditions will change.
Calculation cautions
Do not treat overdue supplier payments as pure efficiency. Check that payment terms are comparable, consider seasonality and use consistent denominators. Inventory days usually require a cost-of-sales base, while customer receivables require the corresponding sales base.