what is the cash conversion cycle ccc 
the cash conversion cycle ccc also called the net operating cycle or cash cycle is a metric that expresses in days how long it takes a company to convert the cash spent on inventory back into cash from selling its product or service the shorter the cash cycle the better as it indicates less time that cash is bound in accounts receivable or inventory the cash conversion cycle attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received this metric considers how much time the company needs to sell its inventory how much time it takes to collect receivables and how much time it has to pay its bills the ccc is one of several quantitative measures that help evaluate the efficiency of a company s operations and management a trend of decreasing or steady ccc values over multiple periods is a good sign while rising ones should lead to more investigation and analysis based on other factors one should bear in mind that ccc applies only to select sectors dependent on inventory management and related operations formula and calculation of the cash conversion cycle ccc since ccc involves calculating the net aggregate time involved across the above three stages of the cash conversion life cycle the mathematical formula for ccc is represented as c c c d i o d s o d p o where d i o days of inventory outstanding also known as days sales of inventory d s o days sales outstanding d p o days payables outstanding begin aligned ccc dio dso dpo textbf where dio text days of inventory outstanding text also known as days sales of inventory dso text days sales outstanding dpo text days payables outstanding end aligned ccc dio dso dpowhere dio days of inventory outstanding also known as days sales of inventory dso days sales outstandingdpo days payables outstanding dio and dso are associated with the company s cash inflows while dpo is linked to cash outflow hence dpo is the only negative figure in the calculation another way to look at the formula construction is that dio and dso are linked to inventory and accounts receivable respectively which are considered short term assets and are taken as positive dpo is linked to accounts payable which is a liability and thus is taken as negative a company s cash conversion cycle broadly moves through three distinct stages to calculate ccc you need several items from the financial statements the first stage focuses on the existing inventory level and represents how long it will take for the business to sell its inventory this figure is calculated by using the days inventory outstanding dio a lower value of dio is preferred as it indicates that the company is making sales rapidly implying better turnover for the business dio also known as dsi days sales of inventory is calculated based on the cost of goods sold cogs which represents the cost of acquiring or manufacturing the products that a company sells during a period d s i avg inventory c o g s 365 days where avg inventory 1 2 bi ei bi beginning inventory ei ending inventory begin aligned dsi frac text avg inventory cogs times 365 text days textbf where text avg inventory frac 1 2 times text bi text ei text bi text beginning inventory text ei text ending inventory end aligned dsi cogsavg inventory 365 dayswhere avg inventory 21 bi ei bi beginning inventoryei ending inventory the second stage focuses on the current sales and represents how long it takes to collect the cash generated from the sales this figure is calculated by using the days sales outstanding dso which divides average accounts receivable by revenue per day a lower value is preferred for dso which indicates that the company is able to collect capital in a short time in turn enhancing its cash position d s o avg accounts receivable revenue per day where avg accounts receivable 1 2 bar ear bar beginning ar ear ending ar begin aligned dso frac text avg accounts receivable text revenue per day textbf where text avg accounts receivable frac 1 2 times text bar text ear text bar text beginning ar text ear text ending ar end aligned dso revenue per dayavg accounts receivable where avg accounts receivable 21 bar ear bar beginning arear ending ar the third stage focuses on the current outstanding payable for the business it takes into account the amount of money that the company owes its current suppliers for the inventory and goods it purchases and it represents the period in which the company must pay off those obligations this figure is calculated by using the days payable outstanding dpo which considers accounts payable a higher dpo value is preferred by maximizing this number the company holds onto cash longer thus increasing its investment potential d p o avg accounts payable c o g s per day where avg accounts payable 1 2 bap eap bap beginning ap eap ending ap c o g s cost of goods sold begin aligned dpo frac text avg accounts payable cogs text per day textbf where text avg accounts payable frac 1 2 times text bap text eap text bap text beginning ap text eap text ending ap cogs text cost of goods sold end aligned dpo cogs per dayavg accounts payable where avg accounts payable 21 bap eap bap beginning apeap ending apcogs cost of goods sold all of the above mentioned figures are available as standard items in the financial statements filed by a publicly listed company as a part of its annual and quarterly reporting the number of days in the corresponding period is taken as 365 for a year and 90 for a quarter 