How fast your stock moves, what holding it costs, and how inventory, debtor and creditor days add up to your cash conversion cycle.
By Manoj Sahukar· October 2026 · 11 min read
How numbers are rounded on these pages. Calculations are done at full precision and rounded only at the end, half up. Rupee amounts are rounded to the nearest rupee unless shown with paise, in which case to the nearest paisa. Percentages are shown to two decimal places, and days to one decimal place. Break-even quantities and reorder levels are rounded up to the next whole unit, because rounding down would leave you short. Economic order quantity is rounded to the nearest whole unit. Interest for a number of days uses a 365-day year. All examples and quiz questions are Hypothetical: they show the method, not real prices or rates.
Stock turnover and holding cost
Stock turnover tells you how many times in a year your stock is sold and replaced. A higher number means goods move fast and your money comes back quickly. Stock days turns the same idea into days: on average, how long an item sits with you before it is sold.
Keeping stock is not free. The holding cost (carrying cost) includes interest on the money tied up in it, godown rent, insurance, and losses from damage, expiry and theft. It is usually expressed as a percentage of the average stock value per year.
Use stock valued at cost and cost of goods sold, not sales, so both sides are on the same footing.
The standard formulas
Average stock = Opening stock + Closing stock2 (at cost)
Stock (inventory) turnoverStock turnover (times a year) = Cost of goods soldAverage stock
Stock days (inventory days)Stock days = Average stockCost of goods sold × 365 = 365Stock turnover
Holding costAnnual holding cost = Average stock × Holding cost rate per year
Terms used
Cost of goods sold (COGS)
The purchase cost of the goods you sold in the period (for a trader: opening stock + purchases − closing stock).
Average stock
Typical value of stock held, at cost. The average of opening and closing is the simplest estimate; monthly averages are better if stock swings.
Holding (carrying) cost rate
Yearly cost of holding stock as a percentage of its value: interest, space, insurance, damage, expiry, shrinkage.
Worked examples
HypotheticalBasicTurnover and stock days for a distributor
Cost of goods sold for the year is ₹60,00,000. Opening stock was ₹4,00,000 and closing stock ₹6,00,000.
Average stock = (₹4,00,000 + ₹6,00,000) ÷ 2 = ₹5,00,000
Stock turnover = ₹60,00,000 ÷ ₹5,00,000 = 12.0 times a year
A trader carries an average stock of ₹8,00,000. His yearly holding costs, as a share of stock value:
Interest on the money tied up: 12%
Godown rent share: 4%
Damage, expiry and shrinkage: 2%
Insurance: 1%
Total holding cost rate = 19% a year. Annual holding cost = ₹8,00,000 × 19% = ₹1,52,000.
HypotheticalAdvancedCutting stock days from 45 to 30
A distributor's cost of goods sold is ₹1,20,00,000 a year. He reduces stock days from 45 to 30. Holding cost rate is 18% a year.
Average stock at 45 days = ₹1,20,00,000 × 45 ÷ 365 = ₹14,79,452
Average stock at 30 days = ₹1,20,00,000 × 30 ÷ 365 = ₹9,86,301
Money released = ₹4,93,151
Holding cost saved = ₹4,93,151 × 18% = ₹88,767 a year
Credit days and the cash conversion cycle
Your money is stuck from the day you pay your supplier until the day your customer pays you. The cash conversion cycle measures that gap in days, using three numbers: how long stock sits (inventory days), how long customers take to pay (debtor days), and how long your suppliers let you take (creditor days).
A shorter cycle means less of your own money is tied up, and you can grow with less borrowing. The trader article on credit cycles explains why this decides survival.
The standard formulas
Inventory days = Average stockCost of goods sold × 365
Debtor days = Trade receivablesCredit sales × 365
Creditor days = Trade payablesCredit purchases × 365 (cost of goods sold is often used if purchases are not known)
Cash conversion cycleCash conversion cycle = Inventory days + Debtor days − Creditor days
Rough rupee sizeMoney tied up ≈ Daily cost of goods sold × Cash conversion cycle (days)
Terms used
Trade receivables (debtors)
Money customers owe you for goods already delivered.
Trade payables (creditors)
Money you owe suppliers for goods already received.
Debtor days
Average number of days customers take to pay.
Creditor days
Average number of days you take to pay suppliers.
Cash conversion cycle
Days between paying for stock and collecting cash from the sale.
Worked examples
HypotheticalBasicCycle from three numbers
Stock sits 20 days, customers pay in 30 days, and the supplier gives 15 days.
Cash conversion cycle = 20 + 30 − 15 = 35.0 days
HypotheticalIntermediateWorking out the three numbers from the books
A distributor's year: credit sales ₹1,46,00,000, cost of goods sold ₹1,31,40,000 (all purchases on credit, roughly equal to cost of goods sold), receivables ₹16,00,000, payables ₹5,40,000, average stock ₹7,20,000.
Inventory days = ₹7,20,000 ÷ ₹1,31,40,000 × 365 = 20.0 days
Debtor days = ₹16,00,000 ÷ ₹1,46,00,000 × 365 = 40.0 days
Creditor days = ₹5,40,000 ÷ ₹1,31,40,000 × 365 = 15.0 days
Cash conversion cycle = 20 + 40 − 15 = 45.0 days
HypotheticalAdvancedWhat 10 fewer debtor days are worth
The same distributor sells ₹40,000 a day on credit. He tightens collections so debtor days fall from 40 to 30. His bank limit costs 12% a year.
Cash released = ₹40,000 × 10 days = ₹4,00,000
Interest saved = ₹4,00,000 × 12% = ₹48,000 a year
His cash conversion cycle falls from 45.0 days to 35.0 days.
Quiz: stock turnover, holding cost and the cash cycle
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