Can Companies Have a Negative Cash Cycle?

by Michaele Curtis

Cash is to a company as oxygen is to the human body. If there’s not enough circulating, you have a problem on your hands. A cash conversion cycle is snapshot of the way a company’s working capital is being used. Unlike a negative cash flow, a negative cash cycle is a good thing and a company can achieve one if its accounts payable and accounts receivable practices encourage it.

Cash Cycle

A cash conversion cycle (or jut cash cycle) is the amount of time it takes for a company, business or organization to receive payment for its products after it has paid for its materials or inventory. You calculate your cash conversion cycle by adding your inventory costs over a certain time to your accounts receivable costs over that same period and then subtracting your accounts payable cost over that period.


Cash cycles are important because it shows how much of a company’s cash flow is tied up during each transaction. Investors and other interested parties look at a company’s cash cycle to get an idea of how efficient the business is being run. The best way to evaluate cash cycle is to calculate and review it over a series of periods of times to compare the trends of a company’s working capital.

Negative Cash Cycles

The lower the cash cycle the better it looks for a company’s finances, so a negative cash cycle is very desirable. A negative cash cycle is one in which you don’t pay for your inventory or materials until after you’ve sold the final product associated with them. It means you’re using your working capital as efficiently as possible and have available cash for other things.

Best Practices

Not all companies can achieve a negative cash cycle due to the nature of their products or consumers. For the ones that can, good credit with their suppliers is a must. The longer a supplier allows you go without payment, the easier achieving negative cash cycle will be. The only side of the equation is collecting payment as soon as possible from your customers. A strict payment policy helps you achieve that.

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