Cash Conversion Cycle
Table of Contents:
Definition of Cash Conversion Cycle
Cash conversion cycle (CCC) refers to a financial metric that measures the time it takes for a company to convert its investment in inventory into cash received from sales.
It assesses the efficiency of a company's working capital management by considering the time it takes to purchase, produce, sell, and collect payments for goods or services.
A shorter CCC indicates effective management of cash flow, while a longer cycle may imply potential liquidity challenges.
What is Cash Conversion Cycle?
Cash conversion cycle (CCC) is a performance metric that evaluates the efficiency of a company's cash flow and working capital management. It represents the duration between the company's investment in inventory and the receipt of cash from customer sales.
A shorter CCC signifies that a company is able to quickly recover cash from its operations, while a longer cycle suggests potential inefficiencies in inventory management and collection of receivables.
How to calculate Cash Conversion Cycle?
The cash conversion cycle (CCC) is calculated using three key components:
Days Inventory Outstanding (DIO)
Average number of days inventory is held before being sold.
Days Sales Outstanding (DSO)
Average number of days it takes to collect payment from customers after a sale.
Days Payable Outstanding (DPO)
Average number of days a company takes to pay its suppliers for purchases.
The formula for calculating CCC is:
CCC = DIO + DSO - DPO
A lower CCC indicates a faster cash cycle, which is generally favorable as it implies better management of working capital and liquidity.
