What is the Cash Conversion Cycle?
The Cash Conversion Cycle (CCC) is a key metric that measures how long a company takes to convert its investments in inventory and other resources into cash flows from sales. It represents the number of days between when a company pays for inventory and when it collects cash from customers.
Formula
$$\text{Cash Conversion Cycle} = \text{DIO} + \text{DSO} - \text{DPO}$$
Where:
- DIO = Days Inventory Outstanding
- DSO = Days Sales Outstanding
- DPO = Days Payables Outstanding
Example Calculation
Let's calculate the cash conversion cycle for a company with:
- Days Inventory Outstanding (DIO): 50 days
- Days Sales Outstanding (DSO): 30 days
- Days Payables Outstanding (DPO): 20 days
$$\text{CCC} = 50 + 30 - 20 = 60 \text{ days}$$
This means the company takes 60 days to convert its cash investments back into cash receipts.
Understanding the Components
Days Inventory Outstanding (DIO)
- Measures how long inventory sits before being sold
- Lower is generally better (faster inventory turnover)
- Formula: (Average Inventory / Cost of Goods Sold) \times 365
Days Sales Outstanding (DSO)
- Measures how long it takes to collect payment from customers
- Lower is better (faster collection)
- Formula: (Accounts Receivable / Revenue) \times 365
Days Payables Outstanding (DPO)
- Measures how long the company takes to pay suppliers
- Higher can be beneficial (keeping cash longer)
- Formula: (Accounts Payable / Cost of Goods Sold) \times 365
Interpreting the Results
Lower CCC is generally better:
- Indicates faster cash conversion
- Shows efficient working capital management
- Means less cash tied up in operations
A negative CCC:
- Occurs when DPO > (DIO + DSO)
- Company collects from customers before paying suppliers
- Very favorable for cash flow
Industry variations:
- Retail businesses often have different cycles than manufacturing
- Compare your CCC to industry benchmarks
- Track changes over time to identify trends
Using This Calculator
Enter your company's metrics to quickly calculate the cash conversion cycle and assess working capital efficiency. This tool helps business owners, financial analysts, and investors evaluate how effectively a company manages its operating cash flow.