Cash Conversion Cycle (CCC): What Is It, and How Is It Calculated?

What Is the Cash Conversion Cycle?

Your cash conversion cycle is one measure of your company’s efficiency and short-term liquidity. It tells you how long it takes your company to turn what it’s invested for generating sales into cash, so a lower value is better. Your cash conversion cycle is an important financial reporting ratio to monitor because it helps your analysts plan your business’s cash flow.

What Is the Formula for the Cash Conversion Cycle?

This is the formula to calculate your cash conversion cycle:

CCC = Days Inventory Outstanding Cycle (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO)

• DIO: average number of days your business takes to convert your inventory into sales
• DSO: average number of days your business takes to collect your accounts receivables
• DPO: average number of days your business takes to pay your accounts payables

Plan your inventory with greater accuracy using this free Inventory Forecasting Template for Excel.

How To Calculate the Cash Conversion Cycle

To calculate your cash conversion cycle, you need these items from your financial statements:

• Revenue
• Cost of goods sold
• Inventory at the start of the period
• Inventory at the end of the period
• Accounts receivable at the start of the period
• Accounts receivable at the end of the period
• Accounts payable at the start of the period
• Accounts payable at the end of the period
• Number of days in the period

Step One: Calculate Days Inventory Outstanding (DIO)

How long does your company take to convert your inventory into sales?

Days Inventory Outstanding (DIO) = (Average Inventory / Cost of Goods Sold) x 365 days

Step Two: Calculate Days Sales Outstanding (DSO)

How long does your company take to collect your accounts receivables?

Days Sales Outstanding (DSO) = Average Accounts Receivable / (Revenue / Day)

Step Three: Calculate Days Payable Outstanding (DPO)

How long does your company take to pay your accounts payables?

Days Payable Outstanding (DPO) = Average Accounts Payable / (COGS / Day)

Why Is Cash Conversion So Important?

Your cash conversion cycle tells you about the lifecycle of your cash activities, informing you of your business’s efficiency and short-term liquidity.

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