LinkedInwithBackgroundYourPrivacyRightsInvestopediaandourthird-partypartnersusecookiesandprocesspersonaldatalikeuniqueidentifiersbasedonyourconsenttostoreand/oraccessinformationonadevice,displaypersonalizedadsandforcontentmeasurement,audienceinsight,andproductdevelopment.TochangeorwithdrawyourconsentchoicesforInvestopedia.com,includingyourrighttoobjectwherelegitimateinterestisused,clickbelow.Atanytime,youcanupdateyoursettingsthroughthe"EUPrivacy"linkatthebottomofanypage.Thesechoiceswillbesignaledgloballytoourpartnersandwillnotaffectbrowsingdata.ListofPartners(vendors)Weandourpartnersprocessdatato:Activelyscandevicecharacteristicsforidentification.Useprecisegeolocationdata.Storeand/oraccessinformationonadevice.Selectpersonalisedcontent.Createapersonalisedcontentprofile.Measureadperformance.Selectbasicads.Createapersonalisedadsprofile.Selectpersonalisedads.Applymarketresearchtogenerateaudienceinsights.Measurecontentperformance.Developandimproveproducts.ListofPartners(vendors)IAcceptShowPurposesCorporateFinance&AccountingGuidetoAccountingFinancialAnalysisCorporateFinanceFinancialStatementsFinancialRatiosAccountingDebtMergers&AcquisitionsCorporateInsuranceSeeAllCorporateFinance&AccountingFinancialStatementsWhatIstheCashConversionCycle(CCC)?Thecashconversioncycle(CCC)isametricthatexpressesthetime(measuredindays)ittakesforacompanytoconvertitsinvestmentsininventoryandotherresourcesintocashflowsfromsales.AlsocalledtheNetOperatingCycleorsimplyCashCycle,CCCattemptstomeasurehowlongeachnetinputdollaristiedupintheproductionandsalesprocessbeforeitgetsconvertedintocashreceived.Thismetrictakesintoaccounthowmuchtimethecompanyneedstosellitsinventory,howmuchtimeittakestocollectreceivables,andhowmuchtimeithastopayitsbills.CCC isoneofseveralquantitativemeasuresthathelpevaluatetheefficiencyofacompany'soperationsandmanagement.AtrendofdecreasingorsteadyCCCvaluesovermultipleperiodsisagoodsignwhilerisingonesshouldleadtomoreinvestigationandanalysisbasedonotherfactors.OneshouldbearinmindthatCC

Cash Conversion Cycle Formula · DIO = Days of inventory outstanding · DSO = Days sales outstanding · DPO = Days payables outstanding.HomeFinancialRatiosLiquidityRatiosCashConversionCycle(CCC)CashConversionCycle(CCC)Thecashconversioncycle(CCC)isameasureoftimeindicatedindaysneededtoconvertinventoryinvestmentsandotherresourcesintosales-derivedcashflow.Alsoknownasanetoperatingcycleorsimplycashcycle,CCCdetermineshowlonganetinputdollarstaysnon-liquidfromproductiontosalebeforeitisreceivedascash.Determiningacompany’sCCC1involvesthreekeyfactors:howlongittakesforitsinventorytobesold,itsaccountsreceivables(AR)tobecollected;anditsaccountspayables(AP)tobesettledwithoutpenalties.WhileARandinventoryareconsideredshort-termassets,APisaliability.Youcanexpressacompany’soperationalandmanagementefficiencythroughdifferentmetrics,includingCCC.ApatternofconsistentordecliningCCCvaluesoversignificantperiodsispositivenews,whiletheoppositeshouldpromptinvestigationandanalysisofotherrelatedelements.NotethatCCConlyappliestoinventory-dependentbusinesses.Note:therearesomeacronymsinthisarticle.We’vetriedtosimplifyasmuchaspossibleandaddedallacronymstothebottomofthearticle.CashConversionCycleFormula$$CCC=DIO+DSO-DPO$$DIO=DaysofinventoryoutstandingDSO=DayssalesoutstandingDPO=DayspayablesoutstandingDIOisthenumberofdaysneededforthewholeinventorytobesold,determinedbydividingtheaverageinventorybythecostofgoodssold(COGS).ThesmallertheDIO2value,thebetter.Theformulatocalculatedaysofinventoryoutstandingis:$$Days\:Inventory\:Outstanding=\bigg[\dfrac{Average\:Inventory}{Cost\:of\:Goods\:Sold}\bigg]\timesDIY$$AverageInventory=Beginninginventory–Endinginventory/2DIY=numberofdaysintheyearDSO3referstothenumberofdaysneededtocollectpaymentsonsales,obtainedbydividingtheaccountsreceivable(AR)byrevenueperday.Althoughcash-onlysaleshaveazeroDSO,peoplemayusecreditprovidedbythecompany,makingthisnumberpositive.AsmallerDSOvalueisagainbetter.Theformulatocalculatedayssalesoutstandingis:$$Days\:Sales\:Outstanding=\bigg[\dfrac{Ave

Cash Conversion Cycle = DIO + DSO – DPO · DIO stands for Days Inventory Outstanding · DSO stands for Days Sales Outstanding · DPO stands for Days Payable ...CashConversionCycleTheamountoftimeittakesacompanytoconvertitsinvestmentsininventorytocashHome›Resources›Knowledge›Accounting›CashConversionCycleWhatistheCashConversionCycle?TheCashConversionCycle(CCC)isametricthatshowstheamountoftimeittakesacompanytoconvertitsinvestmentsininventoryInventoryInventoryisacurrentassetaccountfoundonthebalancesheet, consistingofallrawmaterials,work-in-progress,andfinishedgoodsthatatocash.Theconversioncycleformulameasurestheamountoftime,indays,ittakesforacompanytoturnitsresourceinputsintocash.LearnmoreinCFI’sFinancialAnalysisFundamentalsCourse.  CashConversionCycleFormulaThecashconversioncycleformulaisasfollows: CashConversionCycle=DIO+DSO–DPO Where:DIOstandsforDaysInventoryOutstandingDSOstandsforDaysSalesOutstandingDPOstandsforDaysPayableOutstanding WhatisDaysInventoryOutstanding(DIO)?DaysInventoryOutstanding(DIO)DaysInventoryOutstandingDaysinventoryoutstanding(DIO)istheaveragenumberofdaysthatacompanyholdsitsinventorybeforesellingit.Thedaysinventoryisthenumberofdays,onaverage,ittakesacompanytoturnitsinventoryintosales.Essentially,DIOistheaveragenumberofdaysthatacompanyholdsitsinventorybeforesellingit.Theformulafordaysinventoryoutstandingisasfollows:  Forexample,CompanyAreporteda$1,000beginninginventoryand$3,000endinginventoryforthefiscalyearended2018with$40,000costofgoodssold.TheDIOforCompanyAwouldbe:  Therefore,ittakesthiscompanyapproximately18daystoturnitsinventoryintosales. DaysSalesOutstanding(DSO)DaysSalesOutstanding(DSO)DaysSalesOutstanding(DSO)DaysSalesOutstanding(DSO)representstheaveragenumberofdaysittakescreditsalestobeconvertedintocash,orhowlongittakesaisthenumberofdays,onaverage,ittakesacompanytocollectitsreceivables.Therefore,DSOmeasurestheaveragenumberofdaysforacompanytocollectpaymentafterasale.Theformulafordayssalesoutstandingisasfollows: Forexample,CompanyAreported$4,00

You'll need to reference your financial statements such as the balance sheet and income statement to give you information for the calculations. The cash ...LinkedInwithBackgroundBusinessFinanceFinancialManagementHowtoCalculatetheCashConversionCycleConvertingResourcesIntoCashFlowsByFullBioFollowLinkedinRosemaryCarlsonisanexpertinfinancewhowritesforTheBalanceSmallBusiness.Shehasconsultedwithmanysmallbusinessesinallareasoffinance.Shewasauniversityprofessoroffinanceandhaswrittenextensivelyinthisarea.ReadTheBalance'seditorialpoliciesRosemaryCarlsonUpdatedSeptember05,2019TheBalance2019Thecashconversioncycle(CCC)isanimportantmetricforabusinessownertounderstand.TheCCCisalsoreferredtoasthenetoperatingcycle.Thiscycletellsabusinessownertheaveragenumberofdaysittakestopurchaseinventory,andthenconvertittocash.Thatis,itmeasuresthetimeittakesabusinesstopurchasesupplies,turnthemintoaproductorservice,sellthem,andcollectaccountsreceivable(ifneeded).TheCCCtimeisdependentuponhowacompanyfinancesitspurchases,howitallowscustomerstopay(creditandthecollectionperiod),andhowlongittakestocollect.AlowerCCCisanindicatorofafasterinventory-to-salesprocess.AhigherCCCindicatesaslowerprocess.AlowCCCisgenerallyacceptedasmoredesirable,althoughthisdependsonyourbusiness,industry,andcapabilities.ElementsoftheCashConversionCycleCalculatingtheCCCmayseemintimidatingatfirst,butonceyouunderstandtheelementsinvolvedinthecalculation,itisn'tasconfusing.You'llneedtoreferenceyourfinancialstatementssuchasthebalancesheetandincomestatementtogiveyouinformationforthecalculations.Thecashconversioncycleformulahasthreeparts:DaysInventoryOutstanding,DaysSalesOutstanding,andDaysPayableOutstanding.DaysInventoryOutstandingThefirstpartoftheequationisDaysInventoryOutstanding(DIO).Thisistheaveragetimetoconvertinventoryintofinishedgoodsandsellthem.DIO=(AverageInventory÷CostofGoodsSold)x365Youraverageinventory(invalue)fortheperiodisyourbeginninginventoryvalue+endinginventoryvalue÷2.(BeginningInventory+EndingInventory)÷2Thecostofgoods

CCC Formula = DIO + DSO – DPO ... Each of these totals requires a separate calculation and you used the results of those calculations for the ...CashConversionCycleFormula:HowToCalculateItHome/Blog/CashConversionCycleFormula:HowToCalculateItThecashconversioncycle(CCC)isameasureofthelengthoftimeittakestoconvertinventoryinvestmentsintocash.Thoughitmaysoundcomplicated,it’sfairlyeasytocalculatethesecashconversionswithaformula.Smallbusinessownerscanuseavarietyoffinancialratiostogetagoodideaabouthowwelltheirbusinessisperforming.Chancesareyou’refamiliarwithcommonratiossuchasthedebttoequityratio,thequickratio,andthecurrentratio.However,theCCCmaynotbeoneyouarefamiliarwith.TheCCCissometimesreferredtoasthenetoperatingcycleorthecashcycle.Thisratioismoreimportantifyoupurchaseandmoveyourinventoryonaregularbasis.TheCCCgivesyoualotofinformationfromonecalculation–includingtheamountoftimeyourbusinesstoconvertitscurrentinventoryIntocash,howlongittakestocollectonyouraccountsreceivables,andhowquicklyyouneedtopayyourvendors.Ifyouuseaccountingsoftware,youcanpullthetotalsyouneedtocalculateyourCCCfromyourfinancialstatements.CashConversionCycleFormula:HowToCalculateItTocalculateyourCCC,youhavetofollowmultiplesteps.Beforeyoucandoit,youfirstneedtotalsforthefollowing:DaysofInventoryOutstanding(DIO)Dayssalesoutstanding(DSO)Dayspayablesoutstanding(DPO)CCCFormula=DIO+DSO–DPOEachofthesetotalsrequiresaseparatecalculationandyouusedtheresultsofthosecalculationsforthebassistofcalculatingtheCCC.Youalsoneedtohavethenumberofdaysinthe.Forwhichyou’recalculatingtheCCC.Forinstance,ifyou’recalculatingitforaquarter,youwouldneedtouse90daysandifyouarecalculatingitfortheentireyear,youwoulduse365days.Let’sconsiderKathy–whomanufacturesandsellspersonalizedgoods.ShedecidestocalculatetheCCCforherbusinessin2019.ThesearethestepsKathyneedstotake.Step1:CalculateDIOThefirstpartiscalculatingDIO.Kathyneedstocalculateherdaysofinventoryoutstanding–orDIO.Thisisusedtodeterminehowmanydaysittakestoturntheinventorytosales,withtheDIO

LinkedInwithBackgroundBusinessFinanceFinancialManagementHowtoCalculatetheCashConversionCycleConvertingResourcesIntoCashFlowsByFullBioFollowLinkedinRosemaryCarlsonisanexpertinfinancewhowritesforTheBalanceSmallBusiness.Shehasconsultedwithmanysmallbusinessesinallareasoffinance.Shewasauniversityprofessoroffinanceandhaswrittenextensivelyinthisarea.ReadTheBalance'seditorialpoliciesRosemaryCarlsonUpdatedSeptember05,2019TheBalance2019Thecashconversioncycle(CCC)isanimportantmetricforabusinessownertounderstand.TheCCCisalsoreferredtoasthenetoperatingcycle.Thiscycletellsabusinessownertheaveragenumberofdaysittakestopurchaseinventory,andthenconvertittocash.Thatis,itmeasuresthetimeittakesabusinesstopurchasesupplies,turnthemintoaproductorservice,sellthem,andcollectaccountsreceivable(ifneeded).TheCCCtimeisdependentuponhowacompanyfinancesitspurchases,howitallowscustomerstopay(creditandthecollectionperiod),andhowlongittakestocollect.AlowerCCCisanindicatorofafasterinventory-to-salesprocess.AhigherCCCindicatesaslowerprocess.AlowCCCisgenerallyacceptedasmoredesirable,althoughthisdependsonyourbusiness,industry,andcapabilities.ElementsoftheCashConversionCycleCalculatingtheCCCmayseemintimidatingatfirst,butonceyouunderstandtheelementsinvolvedinthecalculation,itisn'tasconfusing.You'llneedtoreferenceyourfinancialstatementssuchasthebalancesheetandincomestatementtogiveyouinformationforthecalculations.Thecashconversioncycleformulahasthreeparts:DaysInventoryOutstanding,DaysSalesOutstanding,andDaysPayableOutstanding.DaysInventoryOutstandingThefirstpartoftheequationisDaysInventoryOutstanding(DIO).Thisistheaveragetimetoconvertinventoryintofinishedgoodsandsellthem.DIO=(AverageInventory÷CostofGoodsSold)x365Youraverageinventory(invalue)fortheperiodisyourbeginninginventoryvalue+endinginventoryvalue÷2.(BeginningInventory+EndingInventory)÷2Thecostofgoodssoldis:BeginningInventory+Purchases-EndingInventory.DaysSalesOutstandingDaysSalesOutstanding(DSO)istheaverageamountoftimeindaysthatyouraccountsreceivable(yo

A Look at the Cash Conversion Cycle · CCC = Days of Sales Outstanding PLUS Days of Inventory Outstanding MINUS Days of Payables Outstanding · CCC ...ShareonFacebookShareonTwitterShareonLinkedInShareviaE-MailByTimothyP.Connolly,CFACategories:DriversofValueHowmanydaysdoesittakeacompanytopayforandgeneratecashfromthesalesofitsinventory?ThisiswhattheCashConversionCycleorNetOperatingCycletellsus.Itgivesusanindicationastohowlongittakesacompanytocollectcashfromsalesofinventory.Oftenacompanywillfinanceitsinventoryinsteadofpayingforitwithcashupfront.Thismeanstheyowesomeonemoneywhichgenerates“AccountsPayable”.Manytimestheywillturnaroundandsellthatinventoryoncreditwithoutgettingallthecashatthetimeofthesale.Thismeanspeopleowethemmoneyandgenerates“AccountsReceivable”.TheformulafortheCashConversionCycleis:CCC=DaysofSalesOutstandingPLUSDaysofInventoryOutstandingMINUSDaysofPayablesOutstandingorCCC=DSO+DIO–DPOTheentireCCCisoftenreferredtoastheNetOperatingCycle.Itis“net”becauseitsubtractsthenumberofdaysofPayablesthecompanyhasoutstandingfromtheOperatingCycle.ThelogicbehindthisisthatPayablesarereallyviewedasasourceofoperatingcashorworkingcapitalforthecompany.Bycontrast,Receivables,orcashthecompanyhasnotreceivedyet,decreasesworkingcapitalavailabletothecompanytofinanceoperations.DaysofSalesOutstandingDaysSalesOutstandingorDSOcanbedescribedasaverageAccountsReceivabledividedbyRevenueperday.Asareminder,wheneverweuseratiosthatmixBalanceSheetnumbers(AccountsReceivable)withIncomeStatementnumbers(Revenue)weshouldaveragetheBalanceSheetnumbersfromthebeginningandendoftheperiod.ThisisbecausetheIncomeStatementmeasuresactivitythattakesplaceovertheentireperiod,whereasaBalanceSheetisthevaluationofthevariousaccountsonaparticularday(usuallytheendoftheperiod).AverageAccountsReceivablewouldbeAccountsReceivableatthebeginningoftheperiodplusAccountsReceivableattheendoftheperioddividedbytwo.Similarly,RevenueperdaywouldbeRevenuefortheyeardividedby365.Thecompleteformulathereforewouldbe:DSO=[(BegAR+EndAR)/2]/(Reve

Calculating the cash conversion cycle ... The cash conversion cycle encapsulates three key stages of a company's sales activity: ... As such, the CCC is calculated ...SolutionsBuyerSolutionsDynamicDiscountingSupplyChainFinanceCashForecastingInvoiceAutomationSupplierManagementInventoryManagementSupplierSolutionsEarlyPaymentElectronicInvoicingSelf-ServiceCaseStudiesPartnersResourcesResourcesBlogEventsSupplierSurveyReportsWebinarsWhitepapersCovid-19HubGlossaryPaymentTermsDatabaseCompanyCompany OurStoryDiscoverwhoweareandourleadershipOurLeadershipTeamMeettheGamechangersleadingtheway CareersGamechangerswantedNewsNewsandpressreleasesContactUsWe’reheretohelpSupportContactSalesTypeyoursearch...SupportenEnglishDeutschLoginEUPlatformNAPlatformContactSalesTypeyoursearch...Readytoliberateyourcash?DiscoverthesourceofvalueinyoursupplychainContactOurSalesTeam

The cash conversion cycle is calculated by adding the days inventory outstanding to the days sales outstanding and subtracting the days payable outstanding.SkiptocontentMenuHome»FinancialRatioAnalysis»CashConversionCycleThecashconversioncycleisacashflowcalculationthatattemptstomeasurethetimeittakesacompanytoconvertitsinvestmentininventoryandotherresourceinputsintocash.Inotherwords,thecashconversioncyclecalculationmeasureshowlongcashistiedupininventorybeforetheinventoryissoldandcashiscollectedfromcustomers.Thecashcyclehasthreedistinctparts.Thefirstpartofthecyclerepresentsthecurrentinventorylevelandhowlongitwilltakethecompanytosellthisinventory.Thisstageiscalculatedbyusingthedaysinventoryoutstandingcalculation.Thesecondstageofthecashcyclerepresentsthecurrentsalesandtheamountoftimeittakestocollectthecashfromthesesales.Thisiscalculatedbyusingthedayssalesoutstandingcalculation.Thethirdstagerepresentsthecurrentoutstandingpayables.Inotherwords,thisrepresentshowmuchacompanyowesitscurrentvendorsforinventoryandgoodspurchasesandwhenthecompanywillhavetopayoffitsvendors.Thisiscalculatedbyusingthedayspayablesoutstandingcalculation.FormulaThecashconversioncycleiscalculatedbyaddingthedaysinventoryoutstandingtothedayssalesoutstandingandsubtractingthedayspayableoutstanding.AllthreeofthesesmallercalculationswillhavetobemadebeforetheCCCcanbecalculated.AnalysisThecashconversioncyclemeasureshowmanydaysittakesacompanytoreceivecashfromacustomerfromitsinitialcashoutlayforinventory.Forexample,atypicalretailerbuysinventoryoncreditfromitsvendors.Whentheinventoryispurchased,apayableisestablished,butcashisn’tactuallypaidforsometime.Thepayableispaidwithin30daysandtheinventoryismarketedtocustomersandeventuallysoldtoacustomeronaccount.Thecustomerthenpaysfortheinventorywithin30daysofpurchasingit.Thecashcyclemeasurestheamountofdaysbetweenpayingthevendorfortheinventoryandwhentheretaileractuallyreceivesthe cash fromthecustomer.Aswithmostcashflowcalculations,smallerorshortercalculationsarealmostalwaysgo