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