HomeResourcesBlogUnderstandingtheCashConversionCycleTherearemanyfinancialmeasuresasmallbusinessownerneedstokeepaneyeontorunaprofitablebusiness.Whileyou’reprobablyontopofmetricssuchascashflowandsalesprojections,youmaynotbeasdiligentinmonitoringyourcashconversioncycle.Here’sacloserlookatwhatthecashconversioncycleis,howtocalculateit,andwhyitmatterstoyouandtoanypotentialfinancingsourcesyoumayapproach.Whatisacompany’scashconversioncycle?Sometimescalledthe netoperatingcycle or cashcycleorcash-to-cashcycletime,thecashconversioncycle(CCC)measureshowlongittakesyourbusinesstoconvertcashintoinventory,thenintosales,andfinallybackintocashagain.Youcalculatethecashconversioncyclebyfiguringouthowlongittakesyoutosellinventory,howlongittakesyoutocollectyouraccountsreceivable,andhowsoonyoucanpayyouraccountspayable.Thethreecomponentsofthecashconversioncycleare: DaysInventoryOutstanding(DIO).Thisistheaveragetimetoconvertinventoryintofinishedgoodsandthensellthem.YoucancalculateDIObytakingyouraverageinventory,dividingbythecostofgoodssold,andthenmultiplyingby365. DaysSalesOutstanding(DSO).Thisistheaveragenumberofdaysyouraccountsreceivabletakestobecollected.YoucancalculateDSObytakingyouraccountsreceivable,dividingbynetcreditsales,andthenmultiplyingby365.DaysPayableOutstanding(DPO).Thisistheaveragelengthoftimeittakesyourbusinesstopurchasefromvendorsandthenpay(accountspayable)them.YouarriveatDPObytakingtheendingaccountspayableanddividingby(costofgoodssold÷365).Thecashconversioncyclecanbeexpressedasaformula:CCC=DaysInventoryOutstanding(DIO)+DaysSalesOutstanding(DSO)–DaysPayableOutstanding(DPO)What’sagoodcashconversioncycle?Agoodcashconversioncycleisashortone.IfyourCCCisalowor(betteryet)anegativenumber,thatmeansyourworkingcapitalisnottiedupforlong,andyourbusinesshasgreaterliquidity.ManyonlineretailershaveloworevennegativeCCCsbecausetheydrop-shipinsteadofmaintaininginventory,getpaidrightawaywhencustomersbuyproductsanddonothavetopayfortheinventoryuntilcustomershavealreadypaidthem.IfyourCCCisaposi