Cash conversion cycle
The cash conversion cycle is the net number of days cash is tied up in a firm's operating cycle, equal to days inventory outstanding plus days sales outstanding minus days payable outstanding.
FrameworkWorking capital management
See it move
A food manufacturer holds inventory for 30 days, collects receivables in 45 days, and pays suppliers in 20 days. Its cash conversion cycle is 30 + 45 − 20 = 55 days: for 55 days, cash tied up in each batch of product is unavailable for anything else, until customer payments finally arrive.
The formula
Variables
- Days inventory outstanding (average number of days inventory is held) (days)
- Days sales outstanding (average number of days to collect receivables) (days)
- Days payable outstanding (average number of days taken to pay suppliers) (days)
Measures how many days cash is tied up in the operating cycle; a shorter or negative CCC reduces financing requirements.
Check yourself
A food manufacturer has days inventory outstanding (DIO) of 40 days, days sales outstanding (DSO) of 55 days, and days payable outstanding (DPO) of 30 days. What is its cash conversion cycle (CCC)?