The CCC is a crucial business indicator that demonstrates a company’s efficiency. Furthermore, your company may monitor it to see how quickly it turns cash from sales into cash again. Also, it helps you see your current cash flow clearly.
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What is CCC?
Definition: Days to convert inventory into cash flows from sales.
Explanation:
The cash conversion cycle expresses the amount of time your company needs to convert the investments in inventory to cash flow from sales.
Additionally, the CCC is known as the net operating cycle. In other words, the CCC aims to calculate the length of time that each net input dollar spends in the manufacturing and sales cycle before it is turned into cash received.
How to Calculate CCC?
Formula: CCC=DIO+DSO−DPO
Where:
- DIO=Days of inventory outstanding
- DSO=Days sales outstanding
- DPO=Days payables outstanding
Days Inventory Outstanding (DIO) measures how long it takes your business to convert its inventory into sales. To clarify, DIO is the number of days on average that your company keeps its inventory in stock before selling it.
Days Sales Outstanding (DSO) metric measures the average time it takes a business to collect its receivables. In other words, DSO calculates the time it takes a business to collect payment following a purchase.
Days Payable Outstanding (DPO) determines how long it usually takes a business to settle its payables. Therefore, DPO evaluates the average time it takes for a business to pay its trade creditors, or suppliers, for their bills.
Advantages of CCC
#1: Traces The Cash Lifecycle for A Business Activity
It displays your company’s overall cash flow. Therefore, the quicker you convert your cash, the better your cash flow will be.
#2: Directly Improves DIO, DSO or DPO
Having a positive Cash Conversion Cycle can speed up the average days in inventory, reduce the average days of receivable and extend your average days of payable.
The Bottom Line
To conclude, if your company has a lower CCC, it indicates that your company has a stable working capital, liquidity, cash flow, and profitability.
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