The cash conversion cycle (CCC) is a formula in management accounting that measures how efficiently a company's managers are managing its working capital. The CCC measures the length of time between a company's purchase of inventory and the receipts of cash from its accounts receivable. It's used by management to see how long a company's cash remains tied up in its operations.

Key Takeaways

  • The cash conversion cycle (CCC) helps management determine how long a company's cash remains tied up in operations.
  • CCC is calculated as days inventory outstanding plus days sales outstanding min days payable outstanding.
  • A longer CCC means it takes a longer time to generate cash, which can mean insolvency for small companies.
  • A shorter CCC means the company is healthier as it can use additional money can then be used to make additional purchases or pay down outstanding debt.

Cash Conversion Cycle (CCC) Formula

The formula for calculating the cash conversion cycle is:

CCC = DIO + DSO DPO where: CCC = Cash conversion cycle DIO = Days inventory outstanding, the average number of days the company holds its inventory before selling it DSO = Days sales outstanding, the number of days of average sales the company currently has outstanding DPO = Days payable outstanding, the ratio indicating an average number of days the company takes to pay its bills \begin{aligned} &\text{CCC} = \text{DIO} + \text{DSO} - \text{DPO} \\ &\textbf{where:} \\ &\text{CCC} = \text{Cash conversion cycle} \\ &\text{DIO} = \text{Days inventory outstanding, the average number} \\ &\text{of days the company holds its inventory before selling it} \\ &\text{DSO} = \text{Days sales outstanding, the number of days of} \\ &\text{average sales the company currently has outstanding} \\ &\text{DPO} = \text{Days payable outstanding, the ratio indicating} \\ &\text{an average number of days the company takes to pay}\\ &\text{its bills} \\ \end{aligned} CCC=DIO+DSODPOwhere:CCC=Cash conversion cycleDIO=Days inventory outstanding, the average numberof days the company holds its inventory before selling itDSO=Days sales outstanding, the number of days ofaverage sales the company currently has outstandingDPO=Days payable outstanding, the ratio indicatingan average number of days the company takes to payits bills

Why the Cash Conversion Cycle (CCC) Matters to Management

When a company—or its management—takes an extended period of time to collect outstanding accounts receivable, has too much inventory on hand, or pays its expenses too quickly, it lengthens the CCC.

A longer CCC means it takes a longer time to generate cash, which can mean insolvency for small companies.

When a company collects outstanding payments quickly, correctly forecasts inventory needs, or pays its bills slowly, it shortens the CCC. A shorter CCC means the company is healthier. Additional money can then be used to make additional purchases or pay down outstanding debt.

When a manager has to pay its suppliers quickly, it's known as a pull on liquidity, which is bad for the company. When a manager cannot collect payments quickly enough, it's known as a drag on liquidity, which is also bad for the company.