# Cash Conversion Cycle

The Cash Conversion Cycle, also known as CCC, is a financial metric used to calculate the length of time it takes for a company to convert its investments into cash. CCC is a measure of the number of days it takes to convert a company’s investments in inventory and accounts receivable into cash, minus the number of days the company takes to pay its own bills (accounts payable).

It measures the efficiency of a company’s cash flow and helps businesses understand how long it takes to convert sales into cash. The CCC metric is critical for businesses to assess their liquidity and cash flow performance.

## The Cash Conversion Cycle (CCC) Formula

The formula to calculate the Cash Conversion Cycle (CCC) involves three key components:

**CCC = DIO + DSO – DPO**

**Days Inventory Outstanding (DIO)**– measures the number of days it takes the company to convert its inventory into sales.

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

**Days Sales Outstanding (DSO)**– measures the number of days it takes the company to collect its accounts receivable from customers.

DSO = (Average Accounts Receivable / Annual Credit Sales) x 365

**Days Payable Outstanding (DPO)**– measures the number of days it takes the company to pay its vendors and suppliers for goods purchased.

DPO = (Average Accounts Payable / Cost of Goods Sold) x 365

## Example of Cash Conversion Cycle (CCC)

Let’s assume a company has an average inventory value of $50,000, cost of goods sold at $200,000, average accounts receivable of $30,000, annual credit sales of $150,000, and accounts payable of $20,000.

Using the formulas for DIO, DSO, DPO, we can calculate the following:

DIO = ($50,000 / $200,000) x 365 = 91.25 days

DSO = ($30,000 / $150,000) x 365 = 73 days

DPO = ($20,000 / $200,000) x 365 = 36.5 days

CCC = DIO + DSO – DPO = 91.25 + 73 – 36.5 = 127.75 days

Hence, the company takes approximately 128 days, on average, to convert its investments in inventory and accounts receivable into cash.

## Why Is Cash Conversion Cycle (CCC) Important

The Cash Conversion Cycle (CCC) metric helps businesses with:

**Liquidity**: The CCC is an essential measure of the company’s liquidity, indicating how long it takes to convert inventory and accounts receivable into cash to pay bills.

**Cash Flow Management**: The CCC helps to manage cash flow more efficiently by identifying areas that cause delays in the conversion of cash.

**Inventory Management**: The CCC helps in managing inventory levels, as businesses can lower inventory levels to minimize the length of time inventory sits unsold.

**Accounts Receivable Management**: The CCC helps in managing accounts receivable by sending timely invoices and following up on overdue accounts.