SkiptocontentHomeKeyFinancialMetricsNetTradeCycleNetTradeCycleNetTradeCycleisapopularmetricthatnewbusinessclientsalwayswanttolearnmoreabout.The NetTradeCycleissometimesknownbythenameCashConversionCycle.ThewholeideaoftheNetTradeCycleorCashConversionCycleishowfastittakesforcashtogofromthecashbalancethroughtheregulartradecycleofthebusiness.Cash,alongwithvendorpayables,areusedtopurchaseinventory,whichgoesthroughprocessestobecomeaserviceorproductforsale,ultimatelytobesoldandheldasanaccountreceivablebalanceuntileventuallybeingpaidoffbythecustomer.The NetTradeCycleshowshowlongthecashistiedupinthetradecyclebeforecomingbackoutascashagain.Tocalculatethe NetTradeCycle,westartwiththenumberofdays,onaverage,moneyisheldineachofaccountsreceivable(AR),inventory,andaccountspayable(AP).Oncethedaysaretabulatedforeach,ARdaysareaddedtoinventorydaysandAPdayssubtractedouttocomeupwithatotalnettradedays.Thisnetnumberofdayscaneitherbepositive(usually)ornegative. The NetTradeCycletellshowmanydaysitwilltakeforcashtogothroughthetradecyclebacktocash.Notquitethecyclethatwe’retalkingabouthere.PhotobyJoshCanHelpWhenthenettradedaysarepositive,thecompanyneedstofundsthosedayswithnetincomeoralineofcredit.Whenthenettradecycleisnegative,thefirmisbeingpaidfortheserviceorproductbeforethefirmpaysitsvendorAP.Whileanegativenettradecyclecanbeveryadvantageoustoabusiness,itonlyholdstruewhenabusinessisincreasingtherevenues.Whenrevenuesstarttodecline,anegative NetTradeCyclecanbedisastroustocashflow.Basically,apositive NetTradeCycleusescashflowasthebusinessgrowsandanegative NetTradeCycleproducescashflowasabusinessgrows.Thereverseistrueofbothpositiveandnegative NetTradeCycleswhenthebusinessisconstricting.The NetTradeCyclecantellacompanyhowmanycyclesitgoesthroughinayearandhowmanytotaldollarsaretiedupineachcycle.Thisindicateshowmanydollarsaretiedupineachdayineachcategorywhetheraccountsreceivable,inventory,oraccountspayable.Whendaysincreaseinaccountsreceivableorinventory,thecompanyisdecreasingcashflowandcashbalances.Whe