Cash Conversion Cycle (CCC): What It Really Means

The Cash Conversion Cycle measures how long it takes for a company to turn cash spent on inventory into cash received from customers.

It’s a timing metric—shorter is better because it means the business gets its money back faster.

The Formula

Where:

1. DIO — Days Inventory Outstanding

How long inventory sits before being sold.

•           High DIO → slow-moving inventory

•           Low DIO → efficient inventory management

2. DSO — Days Sales Outstanding

How long it takes to collect cash from customers after a sale.

•           High DSO → customers take a long time to pay

•           Low DSO → fast collections

3. DPO — Days Payables Outstanding

How long the company takes to pay its suppliers.

•           High DPO → company holds onto cash longer

•           Low DPO → pays suppliers quickly

Putting It Together

Think of the CCC as a timeline:

1.         Cash goes out to buy inventory

2.         Inventory is held (DIO)

3.         Inventory is sold, but cash isn’t received immediately (DSO)

4.         Meanwhile, the company delays paying suppliers (DPO)

So the CCC tells you:

How many days the company’s own cash is tied up in operations.

Why It Matters

A shorter CCC means:

•           Less cash tied up in working capital

•           More liquidity

•           Better operational efficiency

•           Potentially higher profitability

A longer CCC means:

•           Cash is stuck in inventory or receivables

•           The business may need external financing to operate

•           Higher risk if sales slow down

A Quick Example

Suppose a company has:

•           DIO = 40 days

•           DSO = 30 days

•           DPO = 25 days

This means it takes 45 days from paying suppliers to collecting cash from customers.

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