What Does Cash Conversion Cycle (CCC) Say About a Company's Management?

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. The CCC is used by management to see how long a company's cash remains tied up in its operations.

$\begin{aligned} &\text{CCC} = \text{DIO} + \text{DSO} - \text{DPO} \\ &\textbf{where:} \\ &\text{CCC} = \text{Cash conversion cycle} \\ &\text{DIO} = \text{Days inventory outstanding, the average number} \\ &\text{of days the company holds its inventory before selling it} \\ &\text{DSO} = \text{Days sales outstanding, the number of days of} \\ &\text{average sales the company currently has outstanding} \\ &\text{DPO} = \text{Days payable outstanding, the ratio indicating} \\ &\text{an average number of days the company takes to pay}\\ &\text{its bills} \\ \end{aligned}$​CCC=DIO+DSO−DPOwhere: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​

When a company – or its management – take 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.