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The Cash Conversion Cycle - Visualized
What is it? Why is it important?
The Cash Conversion Cycle (CCC) measures how efficiently a company manages its working capital.
It is the time period between when a company purchases inventory from its suppliers to when it collects the cash from customers.
The shorter the CCC, the less time capital is tied up in the business process, and the better it is for the company's liquidity.
The CCC is measured in days.
The formula is DIO + DSO - DPO
DIO = Days Inventory Outstanding = (Average Inventory/COGS) × 365
DSO = Days Sales Outstanding = (Average AR/ Credit Sales) x 365
DPO = Days Payable Outstanding = (Average AP/ COGS) x 365
AR = Accounts Receivable
AP = Accounts Payable
COGS = Cost of Goods Sold
A bad CCC is 90+ days.
An average CCC is between 30 and 90 days.
A good CCC is <30 days.
A GREAT CCC is <0, which means the company collects cash from customers before it pays its suppliers.
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