Explain the cash conversion cycle and how it impacts a company's liquidity needs.
A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The cash conversion cycle (CCC) measures the time between paying for inventory and receiving cash from sales. It's calculated as DIO + DSO - DPO. A longer CCC ties up cash, increasing liquidity needs. Treasury must ensure sufficient funding to cover the gap, often through short-term borrowing or optimizing working capital. Shortening the CCC improves cash flow and reduces reliance on external financing.
WHAT INTERVIEWERS LISTEN FOR
- ✓CCC = DIO + DSO - DPO
- ✓Longer CCC increases liquidity needs
- ✓Treasury manages funding gap
- ✓Working capital optimization
COMMON MISTAKES
- ✗Confusing CCC with operating cycle
- ✗Ignoring DPO impact
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- How would you structure an in-house bank?
- A company uses physical cash pooling in Germany and notional pooling in the US. The German pool has a surplus of €10M, the US pool has a deficit of $12M. The EUR/USD spot is 1.10. The German subsidiary has a tax rate of 30%, the US 21%. The CFO wants to cover the US deficit. How would you execute this optimally considering tax and FX?
- What is the cash conversion cycle and how does it impact a company's liquidity needs?
- How do you determine the appropriate size of a corporate liquidity buffer?
- When would you build a cash forecast using the direct method versus the indirect method, and what are the limits of each?
- What is trapped cash, and what are your options when a subsidiary holds large balances in a jurisdiction with capital controls?