The duration of the cash cycle is the time between the date the inventory is paid for and the date the cash is collected from the sale of the inventory. A company’s cash cycle is important as it affects the need for financing. The cash cycle is calculated as:

days in inventory + days in receivables – days in payables

Financing requirements will increase if either of the following occurs:

– Sales increase while the cash cycle remains fixed in duration.

– Sales remain flat but the cash cycle increases in duration.