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