Cash Conversion Cycle

Discover how to keep more cash on hand to reinvest or fund operating expenses.

The Cash Conversion Cycle (CCC) measures the time it takes your business to purchase raw materials or other inputs, turn them into a product or service, sell them, and collect accounts receivable. The faster you convert, the more cash you have on hand to reinvest back into your business or to fund operations.

Think of it as a pipeline that follows your cash as it is first converted into inventory and accounts payable, through the sales and accounts receivable cycle, then back into cash. Then think of each of those factors (inventory, A/R, A/P) as a lever you can press to move cash through the pipeline faster. Any time you can change one of those levers (for example, get invoices paid faster or wait longer to pay for inventory), the better.

Your CCC time depends on payment terms from vendors, how you allow customers to pay (credit and the collection period), and how long it takes to collect. Using our funding solutions to impact those levers can help you keep more capital in your control for longer.

How to measure CCC?

The overall formula is calculated by adding the days your inventory is outstanding to the days your sales are outstanding and subtracting the days your payables are outstanding. Simply plug your numbers into the calculator below.

You can use this metric to guide you in which funding strategies to use to improve the time it takes to sell your inventory or services, collect on receivables, or pay your bills.

  • Average Inventory over the last 12 month

  • Average Accounts Receivable over the last 12 months

  • Average Accounts Payable over the last 12 month

  • Cost of Goods Sold (Annual)

  • Revenue (Annual)

  • Days of Inventory Outstanding (DIO)

  • Days of Sales Outstanding (DSO)

  • Days of Payables Outstanding (DPO)

  • Cash Conversion cycle (dio + dso - dpo)

(Model Assumes 365 period)

DIO (Days of Inventory Outstanding): The average number of days needed to clear the inventory.

DSO (Days of Sales Outstanding): The average number of days needed to collect payment from a customer after a sale.

DPO (Days Payables Outstanding): The average number of days it takes to pay a vendor.

 

CCC Example

Joanne’s Cable is a manufacturer that specializes in cable and harness assembly. Joanne buys inventory from one main vendor and pays her accounts within 10 days to get a purchase discount. She has a fairly high inventory turnover for the industry, and can collect accounts receivable from her customer within 45 days on average. So, her CCC is:

  • Days inventory outstanding: 60 days
  • Days sales outstanding: 45 days
  • Days payables outstanding: 10 days

60 days + 45 Days – 10 Days = 95 Days

This means it takes Joanne 95 days from paying for her inventory to receive the cash from its sale. By using funding solutions to change any one of these inputs, she can see where she can improve her cash conversion cycle.