Cash Conversion Cycle (CCC): What Is It, and How Is It Calculated?
The cash conversion cycle is the amount of time your company takes to convert your inventory and other investment resources into cash. It’s also referred to as Net Operating Cycle or Simple Cash Cycle.
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.
Key Takeaways
Cash conversion cycle measures your efficiency and short-term liquidity.
Cash conversion cycle helps your analysts in cash flow planning and inventory forecasting.
A lower cash conversion cycle is better.
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
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.
Understand your cash flow drivers better with Vena’s Cash Flow Management Software. Maximize your investments, minimize your borrowing and trust your cash flow projections.
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