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.
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 – 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.