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