Procurement Glossary
Cash-to-cash cycle: definition, calculation and optimization in Procurement
November 19, 2025
The cash-to-cash cycle is a key performance indicator in working capital management that measures the time between cash being spent on raw materials and cash being received through sales. This metric shows how efficiently a company manages its tied-up capital and has a significant impact on liquidity. Find out below how the cash-to-cash cycle is calculated, what optimization approaches exist and how purchasing departments can contribute to improvement.
Key Facts
- Calculation: Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding
- Shorter cycles mean less tied-up capital and better liquidity
- Typical values vary greatly depending on the industry (30-120 days)
- Procurement can optimize through payment terms and supplier management
- Direct influence on the company's cash flow and financing costs
Contents
Definition and meaning of cash-to-cash cycle (key figure)
The cash-to-cash cycle quantifies the period of time between the outflow of funds for material purchases and the receipt of funds through customer sales.
Basic components
The key figure is made up of three main elements:
- Days Inventory Outstanding (DIO): Days inventory outstanding
- Days Sales Outstanding (DSO): Days sales outstanding
- Days Payable Outstanding (DPO): Payable period
Cash-to-cash cycle vs. operating cycle
While the operating cycle only includes DIO and DSO, the cash-to-cash cycle also takes into account payment deferrals to suppliers. This makes it a more precise indicator for actual working capital management.
Importance in Procurement
Purchasing departments directly influence the cash-to-cash cycle by negotiating payment terms, evaluating suppliers and optimizing inventories. Strategic procurement can significantly reduce the amount of capital tied up.
Measurement, database and calculation
Calculating the cash-to-cash cycle requires precise financial data and a systematic approach to data collection.
Calculation formula
Cash-to-cash cycle = DIO + DSO - DPO. All components are expressed in days:
- DIO = (average inventory / cost of sales) × 365
- DSO = (average receivables / sales) × 365
- DPO = (average liabilities / cost of sales) × 365
Data sources and quality
Reliable calculations are based on current balance sheet and P&L data. ERP systems provide the necessary information on inventories, receivables and payables. The three-way match rate has a significant impact on data quality.
Reporting and monitoring
Regular monitoring usually takes place on a monthly or quarterly basis. Dashboard solutions enable real-time analyses and trend tracking. Integration with spend-under-management systems improves the informative value.
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Interpretation & target values for cash-to-cash cycle
Assessing the cash-to-cash cycle requires industry-specific benchmarks and a differentiated view of the influencing factors.
Sector-specific target values
Manufacturing companies typically achieve 60-90 days, while trading companies often aim for 30-60 days. Negative values are possible in fast-moving industries. Inventory turns have a significant influence on the target values.
Performance indicators
Improvements of 5-10 days per year are considered ambitious but achievable. Quarterly fluctuations below 15% show stable processes. On-time delivery should remain above 95% despite optimization.
Monitoring and control
Trend analyses over 12-24 months identify structural improvements. Segmentation by product group enables targeted measures. Integration with service level indicators prevents one-sided optimization.
Risks, dependencies and countermeasures
Optimizing the cash-to-cash cycle entails various risks that can be minimized by taking appropriate measures.
Liquidity risks
Aggressive optimization can lead to liquidity bottlenecks. Excessive inventory reduction jeopardizes on-time delivery and delivery capability. Risk management requires balanced buffer stocks and diversified sources of financing.
Supplier relationships
Extended payment terms can put a strain on supplier relationships and reduce delivery call-off loyalty. Smaller suppliers are particularly at risk. Transparent communication and fair conditions maintain long-term partnerships.
Operational dependencies
A strong focus on cycle optimization can limit operational flexibility. Seasonal fluctuations and market volatility require adaptable strategies. The complaint rate can increase due to quality compromises.
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Practical example
A mechanical engineering company reduced its cash-to-cash cycle from 85 to 65 days through strategic measures. The purchasing department negotiated payment terms from 30 to 45 days and implemented a supplier evaluation system. At the same time, the company optimized its warehousing through better demand forecasting.
- DPO extension by 15 days due to payment target negotiations
- DIO reduction by 8 days through inventory optimization
- DSO improvement of 3 days through more efficient receivables management
Current developments and effects
Digitalization and changing market conditions are shaping the evolution of cash-to-cash cycle management in modern companies.
Digital transformation
AI-supported systems automatically optimize cash flows and inventories. Predictive analytics improve forecast accuracy and reduce capital commitment. Machine learning identifies optimization potential in real time.
Supply Chain Finance
Innovative financing solutions such as reverse factoring extend payment terms without charging suppliers. Dynamic discounting enables flexible discount utilization. This makes the discount rate strategically controllable.
Sustainability and ESG
ESG criteria are increasingly influencing supplier selection and payment terms. Sustainable procurement can justify longer cash-to-cash cycles. Supplier ratings are increasingly integrating sustainability aspects alongside financial indicators.
Conclusion
The cash-to-cash cycle is a central control parameter for efficient working capital management. Purchasing departments play a key role in optimization through payment target negotiations and supplier management. Successful companies balance cycle improvements with operational stability and sustainable supplier relationships. Digitalization opens up new optimization opportunities through AI-supported analyses and innovative financing solutions.
FAQ
What is a good cash-to-cash cycle value?
A good value depends heavily on the industry. Manufacturing companies typically achieve 60-90 days, while retail companies aim for 30-60 days. Negative values are possible with fast-moving business models and show very efficient working capital management.
How can Procurement improve the cash-to-cash cycle?
Procurement optimizes the cycle by negotiating longer payment terms, strategic supplier selection and inventory management. Discount optimization, supply chain finance solutions and improved demand forecasts also contribute to the improvement.
What are the risks of aggressive cycle optimization?
Excessive optimization can lead to liquidity bottlenecks, deteriorated supplier relationships and reduced safety stocks. This jeopardizes the ability to deliver and can cause higher costs in the long term than the financing costs saved.
How often should the cash-to-cash cycle be measured?
Monthly measurements enable timely control measures, while quarterly analyses are sufficient for strategic decisions. Continuous monitoring through dashboard solutions offers the best transparency for operational and strategic decisions.
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