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The cash conversion cycle is the amount of time your company takes to convert your inventory and other investment resources into cash. It’s also referred to as Net Operating Cycle or Simple Cash Cycle.
Your cash conversion cycle is one measure of your company’s efficiency and short-term liquidity. It tells you how long it takes your company to turn what it’s invested for generating sales into cash, so a lower value is better. Your cash conversion cycle is an important financial reporting ratio to monitor because it helps your analysts plan your business’s cash flow.
This is the formula to calculate your cash conversion cycle:
CCC = Days Inventory Outstanding Cycle (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO)
Plan your inventory with greater accuracy using this free Inventory Forecasting Template for Excel.
To calculate your cash conversion cycle, you need these items from your financial statements:
How long does your company take to convert your inventory into sales?
Days Inventory Outstanding (DIO) = (Average Inventory / Cost of Goods Sold) x 365 days
How long does your company take to collect your accounts receivables?
Days Sales Outstanding (DSO) = Average Accounts Receivable / (Revenue / Day)
How long does your company take to pay your accounts payables?
Days Payable Outstanding (DPO) = Average Accounts Payable / (COGS / Day)
Your cash conversion cycle tells you about the lifecycle of your cash activities, informing you of your business’s efficiency and short-term liquidity.
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