The entire process starts with the receipt of raw materials. If they are purchased on credit, there is a commitment, in terms of accounts payable, but a cash disbursement has not yet been made. So in effect, the time from when a purchase commitment is made until the time the supplier is paid is really financing that the business is gaining, and serves to reduce the need for other sources of financing.
If production is not started immediately, there will be a period of time when raw materials are in inventory. Once production starts, the raw materials will enter the next phase - the work-in-process inventory, where additional costs such as labor and utilities will be added. The work-in process period ends when the products are completed and the production cycle ends with the finished goods inventory.
It may turn out that products are not sold immediately upon completion, so there is a period when finished products remain in inventory pending their sale. And when sales are made, there may be a delivery period involved, and the sales may be on credit terms, so the process enters the final period in which accounts receivable are pending payment. Once collection is made and payment is received from the customer, the cycle is complete.
So, the overall business cycle can be broken down as follows:
Number of days raw materials are in inventory
Minus number of days of accounts payable to suppliers
Plus number of days in work-in-process
Plus number of days products are in finished goods inventory
Plus collection period from customers
Equals cash conversion period.
Once these periods are defined, calculations can be made to begin to develop an estimate of working capital needs.