Understanding the Cash Conversion Cycle

by

The cash conversion cycle (CCC), also sometimes referred to as Cash Cycle or as the Net Operating Cycle, measures the time it takes for a businesses’ investments to become sales and then into revenue. This metric accounts for how much time it takes to move your inventory. Also, CCC accounts for the time it takes you to get paid by your customers. Along with how long you take to pay your debts without incurring additional fees or interest. Most commonly, businesses measure CCC in days.

How to calculate CCC

Calculating CCC comes down to one formula:

CCC = DIO + DSO – DPO

Appearances can be deceiving. While the formula may look relatively simple, it can be complicated. Check out a breakdown of it:

  • CCC = Cash Conversion Cycle
  • DIO = Days of Inventory Outstanding: This is the average number of days needed to clear out your inventory.
  • DSO = Days of Sales Outstanding: This is the average number of days needed to collect your customers’ payment after a transaction.
  • DPO = Days Payables Outstanding: This is the average number of days it takes your company to pay its bills.

Head to your business’ financial statements to find the numbers you need to calculate the CCC formula. Remember, only use the numbers from the given time you are working in:

  • The set number of days or period you are measuring
  • Total revenue and cost of goods sold
  • The complete inventory in the beginning and at the end
  • How many receivables your company has at the beginning and the end of the period.
  • How much your company owes at the beginning and the end of the specified period.

Why is CCC important

The cash conversion cycle is essential to understand for two reasons. First, it’s an indicator of the company’s efficiency in managing its valuable working capital assets. Secondly, it provides a clear view of a company’s ability to pay off its current liabilities.

See How Reach Works.

No credit card needed

In order to help you the best, tell us what kind of business would describe you?

Additional Articles

0 Comments

Submit a Comment

Your email address will not be published.

Pin It on Pinterest

Share This