Wednesday, September 02, 2009

Costco exceptional cash conversion cycle

Costco also has an exceptional cash conversion cycle. That's a little formula that measures, in days, how quickly a company can buy inventory, get it on the shelves, and sell it, thus converting it to cash. Costco turns over its entire inventory 12.8 times a year (more than once a month!) -- allowing it to sell merchandise even before it has to pay its suppliers for it.

This enables the company to buy some of its inventory on the vendors' payment terms instead of using its working capital. Costco's outstanding cash conversion cycle has run one to three days over the past few years. By comparison, a more traditional retailer like Macy's usually takes at least 70 days to convert its inventory to cash.

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