Summarize this article in one sentence.
The cash conversion cycle measures the number of days it takes a company to convert its resources into cash flow. Days in inventory is the first of three parts for this calculation. The second is the days sales outstanding, which is the number of days it takes the company to collect on accounts receivable. The third part is the days payable outstanding, which states how many days it takes the company to pay its accounts payable. The cash conversion cycle follows cash as it is first turned into inventory and accounts payable, then into sales and accounts receivable, and finally back into cash again. It measures the effectiveness of the company's management. Having a quick cash conversion cycle shows that management has devised ways to reduce time wasted by the business by keeping items in inventory for a short time and getting payment for goods quickly. Doing both of these requires tightly managed and carefully planned systems. The number of days in inventory expresses how long a company holds on to its inventory. This clarifies how long a company's cash is tied up in its inventory. The longer a company holds on to its inventory, the more chances it has of losing money on that investment. Items in inventory can become outdated or they can expire. Also, prices can fall, which devalues the inventory. Holding inventory for a long period also educes return on investment, as excess capital is tied up in inventory during this time. The number of days in inventory makes more sense as a measure of effectiveness if you compare it with that of other businesses in the same industry. Different kinds of businesses sell their inventory at different rates. Retailers who sell perishable items have a smaller number of days in inventory than a company that sells cars or furniture. Therefore, compare your days in inventory with other businesses in the same industry to determine if you are selling your inventory efficiently. You can also compare your days in inventory with your own historical inventory days calculations. This will help you identify trends, positive or negative, that might be affecting your cash conversion cycle duration.
Examine the cash conversion cycle. Evaluate inventory effectiveness. Compare your company's days in inventory with other businesses in the same industry.