The cash conversion cycle (CCC) is a financial metric that measures the length of time it takes a company to convert its investments in inventory (stock and work in progress) and other resources into cash flow from sales. It is also known as the “net operating cycle” or “cash cycle.”
The cash conversion cycle is calculated by adding the days inventory outstanding (DIO) to the days sales outstanding (DSO), and then subtracting the days payables outstanding (DPO).
CCC = DIO + DSO – DPO
Days inventory outstanding (DIO): This is the number of days it takes for a company to sell its inventory.
Days sales outstanding (DSO): This is the average number of days it takes for a company to collect payment from its customers after making a sale.
Days payables outstanding (DPO): This is the average number of days it takes for a company to pay its suppliers for inventory and all other expenses.
Understanding the cash conversion cycle is important because it can provide insights into a company’s liquidity and financial health. A shorter CCC indicates that a company is able to turn its investments into cash more quickly, which is a positive sign. On the other hand, a longer CCC may indicate that a company is having difficulty managing its inventory, collecting payments from customers, or paying its suppliers. This can lead to cash flow problems and potentially hurt a company’s ability to grow and invest in new opportunities.
By monitoring and managing the cash conversion cycle, companies can improve their working capital management and financial performance, and better position themselves for long-term success.
