Cash Conversion Cycle

To run a successful business, you need to learn how companies and investors can use the Cash Conversion Cycle (CCC) to evaluate operational efficiencies, save costs associated with production, and identify growth opportunities. The time needed for a business to turn its stock and other assets into cash generated by sales is expressed by the CCC. Also, this metric is quantified in days. The Cash Cycle Calculator, also known as the Net Operating Cycle, aims to quantify how long each net input dollar is involved in the manufacturing and sales process before it is turned into cash received. In simple terms, this indicator considers amount of time needed for the business to sell its merchandise, collect receivables, and make bill payments.

The Cash Conversion Cycle Formula (CCC)

The calculation of the CCC involves determining the total net time spent in the cash conversion lifecycle’s three stages. As a result, CCC may be calculated through the approach below:

CCC = DIO + DSO – DPO

Let’s explain each element of the formula below.

Days Inventory Outstanding

The average time a company takes to convert its inventory into sales is called Days Inventory Outstanding (DIO). DIO essentially refers to the typical number of days a company holds its inventory before selling it.

Days Sales Outstanding

The DSO provides information on number of days the customer usually takes before paying for goods or service after the transaction. A lower amount is preferable because you want to get paid quickly by your customers, but as always, you need to consider the circumstances.

Days Payable Outstanding (DPO)

When you measure how long a company typically takes to make purchases from its suppliers (liability) and pay for those purchases, it’s known as Days Payable Outstanding or DPO.

Once you have determined all three required formula elements, you can go ahead to calculate the Cash Conversion Cycle using;

CCC (or Net Operating Cycle) = DIO + DSO – DPO

Use of the Cash Conversion Cycle

The CCC is useful information. But it is only really relevant if you calculate it annually and compare it to your company’s performance in previous years. You’ll also need to compare the formula’s other three components.