Cash Conversion Cycle

CCC Full Form: Cash Conversion Cycle

Cash Conversion Cycle.webp

Key Highlights

  • A financial indicator known as the Cash Conversion Cycle (CCC) gauges a company's ability to convert inventory investments into cash from sales.

  • There are three key components to the CCC which are days inventory outstanding (DIO), days sales outstanding (DSO), days payables outstanding (DPO).

What is CCC?

A financial indicator known as the Cash Conversion Cycle (CCC) gauges a company's ability to convert inventory investments into cash from sales. It basically follows the path of cash, from the time a business purchases raw supplies until it gathers consumer payments.

How Cash Conversion Cycle Works?

There are three key components to the CCC:

  • Days Inventory Outstanding (DIO): The number of days a company takes to sell its inventory.

  • Days Sales Outstanding (DSO): The average time it takes to collect payments from customers.

  • Days Payables Outstanding (DPO): The number of days a company takes to pay its suppliers.

Cash Conversion Cycle Formula

CCC = DIO+DSO−DPO

For liquidity, a shorter CCC indicates a corporation recovers cash more quickly. A lengthier CCC could point to problems in sales, inventory control, or collecting.

Example of Cash Conversion Cycle

Assume a corporation spends 40 days selling its merchandise (DIO), 30 days gathering consumer payments (DSO), and 35 days paying its suppliers (DPO).

CCC=40+30−35=35 days.

The corporation thus needs 35 days to turn its inventory investment into cash.

Importance of Cash Conversion Cycle

While a high CCC could point to delays in sales or collections, so affecting liquidity, a low CCC suggests good cash flow management. Companies want to maximize their CCC to keep their financial situation and operations free from disturbance.

Connect with an
Expertquotes
Personalized investment strategies from leading experts