Cash Conversion Cycle
The cash conversion cycle measures in days how long it takes from paying suppliers to receiving cash from customers. It is receivable days plus inventory days minus payable days, and shows how many days the business has to pre-finance itself.
The formula
CCC = DSO + DIO − DPO
- DSO (days sales outstanding): average days until cash is received.
- DIO (days inventory outstanding): average days goods sit in stock.
- DPO (days payables outstanding): average days taken to pay suppliers.
Worked example
A distributor: DSO 45 days, DIO 60 days, DPO 30 days. The cash conversion cycle is 75 days – for 75 days the business has to fund itself, from its own means or a credit line.
At annual revenue of twelve million euros and cost of goods at 60 percent, that ties up roughly 1.5 million euros. Every day removed frees about 20,000 euros – permanently, without a single euro of extra revenue.
Why it comes before the cash forecast
A 13-week cash flow forecast shows when it gets tight. The cash conversion cycle shows why. They belong together: the forecast is the early-warning system, the cycle is the diagnosis.
Limits
For service and software businesses without inventory, DIO drops out and the cycle reduces to DSO minus DPO. In strongly seasonal businesses a single balance-sheet date distorts the picture – use a twelve-month rolling average. And comparison with other companies only carries within the same sector: 75 days is unremarkable in machinery and an alarm signal in food retail.