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What is the cash conversion cycle?

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The cash conversion cycle (CCC) is the cycle from the conversion of cash into inventory, from inventory into accounts receivable, and then back into cash:

Days Inventory Outstanding + Days Sales OutstandingDays Payable Outstanding

Where:

  • Days inventory outstanding (DIO) – Shows how many days it takes a firm to sell its entire inventory:

Average inventory/COGS per Day

  • Days sales outstanding (DSO) – Measures the number of days a firm needs in order to collect on its sales:

Average Accounts Receivable/Revenue per Day

  • Days payable outstanding (DPO) – Shows the number of days it takes a firm to pay its own accounts payable:

Average Accounts Payable/COGS per Day

The cash conversion cycle is one of the most important metrics when conducting a cash flow analysis of a company.  A firm should not tie up more capital than necessary in inventories, since the faster the goods can be turned over, the greater the profit on the capital invested.   A relatively low CCC discloses a favorable condition and indicate the capacity of management to turnover inventory quickly.

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