Cash Conversion Cycle (CCC)

What is the CCC?

The cash conversion cycle (CCC) measures the number of days a company’s cash is tied up in the operating cycle — from purchasing inventory to collecting cash from sales — after accounting for the time it defers payments to suppliers. A shorter CCC indicates more efficient working-capital management; a negative CCC means a company collects cash before it must pay suppliers.

Formula

CCC = DIO + DSO − DPO

Where:
* DIO = Days Inventory Outstanding
* DSO = Days Sales Outstanding
* DPO = Days Payables Outstanding

Components and how to calculate them

All inputs are generally available in a company’s financial statements. Use 365 days for annual calculations (or 90 for a quarter).

Days Inventory Outstanding (DIO)
* Measures how long inventory sits before being sold.
* DIO = (Average Inventory ÷ Cost of Goods Sold) × 365
* Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2

Days Sales Outstanding (DSO)
* Measures how long it takes to collect cash from sales.
* DSO = (Average Accounts Receivable ÷ Revenue) × 365
* Average Accounts Receivable = (Beginning AR + Ending AR) ÷ 2

Days Payables Outstanding (DPO)
* Measures how long the company takes to pay suppliers.
* DPO = (Average Accounts Payable ÷ Cost of Goods Sold) × 365
* Average Accounts Payable = (Beginning AP + Ending AP) ÷ 2

Worked example

If DIO = 50 days, DSO = 30 days, and DPO = 40 days:
CCC = 50 + 30 − 40 = 40 days
This means cash is tied up for 40 days on average.

How to interpret CCC

• Lower CCC = cash is converted back into the business faster → generally better.
• Higher CCC = cash is tied up longer in inventory or receivables or paid out too quickly → potential liquidity strain.
• Negative CCC = company receives cash from customers before paying suppliers (common among certain retailers/platforms) and can be a competitive advantage if sustainable.

Industry differences and examples

• Retailers and distributors: CCC is especially relevant because they manage physical inventory (e.g., large supermarket chains).
• E-commerce platforms: Can have negative CCC when they collect payments immediately and pay third-party sellers on a delayed schedule.
• Service, software, insurance, and brokerage firms: CCC is often less relevant because they don’t hold significant physical inventory.

What affects the CCC

Key drivers:
* Inventory management — faster inventory turnover reduces DIO.
* Credit terms and collection — tighter credit control and faster collections reduce DSO.
* Supplier payment terms — negotiating longer payment terms increases DPO and shortens CCC.

Relation to liquidity and operating performance

CCC provides insight into working-capital efficiency and short-term liquidity:
* A shorter CCC improves available cash for operations and investment.
* CCC should be evaluated alongside liquidity ratios (current ratio, quick ratio) and profit metrics (ROE, ROA).
* When comparing peers, consider industry norms and business model differences.

Practical guidance

• Compare CCC over time to spot improvements or deterioration in working capital.
• Benchmark CCC against industry peers rather than across unrelated sectors.
• Investigate the drivers behind changes (inventory buildup, slower collections, tighter supplier terms) before drawing conclusions.
• Be cautious: an unusually low or negative CCC can reflect strong operations or aggressive supplier terms that may not be sustainable.

Bottom line

The CCC distills how quickly a company converts investments in inventory and receivables back into cash after accounting for payables. It’s a useful, intuitive metric for assessing working-capital efficiency, but must be interpreted in context — trending and industry comparisons matter most.