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