Cash Conversion Cycle (CCC), Formula to Calculate CCC, How to Calculate Cash Conversion Cycle - financebrother

Cash Conversion Cycle (CCC)
Cash Conversion Cycle (CCC) simply refers to the efficiency of the company’s operations cycle. It denotes how many days it takes for the company to convert their inventory into cash and cash equivalents.

Cash Conversion Cycle (CCC) = Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payable Outstanding (DPO)

There are three components to calculating the Cash Conversion Cycle (CCC):
1. Days Sales Outstanding (DSO)
2. Days Inventory Outstanding (DIO)
3. Days Payable Outstanding (DPO)

Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) denotes on an average how many days are taken by the company to collect money from their customers. It is calculated by using the following formula:

Days Sales Outstanding (DSO) = (Accounts Receivables (AR) / Sales) * 365

Days Inventory Outstanding (DIO)
Days Inventory Outstanding (DIO) denotes on an average how many days a company has to hold their inventory in storage before it becomes sold out. It is calculated using the below formula:

Days Inventory Outstanding (DIO) = (Inventory / Cost of Goods Sold (COGS)) * 365

Days Payable Outstanding (DPO)
Days Payable Outstanding (DPO) denotes the average number of days you receive credit from your material suppliers.

Days Payable Outstanding (DPO) = (Accounts Payable (AP) / Cost of Goods Sold (COGS)) * 365

Example: Find the Cash Conversion Cycle with the given data below:
Sales: $100,000
Cost of goods sold (COGS): $60,000
Account Receivables (AR): $20,000
Accounts Payable (AP): $14,000
Inventory: $16,000

Cash Conversion Cycle (CCC) = Days Sales Outstanding (DSO) + Days Inventory Outstanding (DIO) – Days Payable Outstanding (DPO)

Cash Conversion Cycle (CCC) = 73 days + 97.33 days – 85.16 days

Cash Conversion Cycle (CCC) = 85.17 days.

Working:

Days Sales Outstanding (DSO) = (Accounts Receivable (AR) / Sales) * 365
Days Sales Outstanding (DSO) = ($20,000 / $100,000) * 365
Days Sales Outstanding (DSO) = 73 days

Days Inventory Outstanding (DIO) = (Inventory / Cost of goods sold (COGS)) * 365
Days Inventory Outstanding (DIO) = ($16,000 / $60,000) * 365
Days Inventory Outstanding (DIO) = 97.33 days

Days Payable Outstanding (DPO) = (Accounts Payable (AP) / Cost of goods sold (COGS)) * 365
Days Payable Outstanding (DPO) = ($14,000 / $60,000) * 365
Days Payable Outstanding (DPO) = 85.16 days