Cash Conversion Cycle

Measures the number of days a company takes to convert its inventory into cash flow from sales

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: David Bickerton
David Bickerton
David Bickerton
Asset Management | Financial Analysis

Previously a Portfolio Manager for MDH Investment Management, David has been with the firm for nearly a decade, serving as President since 2015. He has extensive experience in wealth management, investments and portfolio management.

David holds a BS from Miami University in Finance.

Last Updated:November 7, 2023

What Is The Cash Conversion Cycle?

The Cash Conversion Cycle, also known as the Cash Cycle, measures the number of days a company takes to convert its inventory into cash flow from sales.

In other words, it is essentially the number of days between the payment to the seller (business) for the inventory and the actual receipt of the money by the seller from the buyer (customer).

This is an important metric for businesses in certain industries to understand how efficient they are in managing their working capital, as failure to do this may result in

  • Not being able to meet financial obligations
  • Restructuring by selling off assets and liquidating them to meet financial obligations
  • Filing for bankruptcy
  • Inefficient use of company resources, indicating that its assets are not being utilized optimally to generate a return on investment (ROI)

The cycle considers the liquidity risks associated with the manufacturing and sales process, which is the time it takes for the company to sell inventory, obtain credit, and pay bills.

Key Takeaways

  • The Cash Conversion Cycle (CCC) measures the time a company takes to convert inventory into cash flow from sales.
  • The CCC signifies the period between payment for inventory and receipt of payment from customers, which is crucial for working capital management.
  • CCC comprises Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO).
  • Comparing a company's CCC to industry peers and analyzing trends over time provides valuable insights. Investors assess CCC to gauge a company's financial health and operational efficiency.

Cash Conversion Cycle Formula

There are a few formulas that we need to first understand before being able to calculate CCC.

The formula for calculating CCC is given as



  • DIO = Days Inventory Outstanding
  • DSO = Days Sales Outstanding
  • DPO = Days Payable Outstanding

For example, if your business takes an average of 14.2 days to convert inventory (DIO = 14.2), 15.6 days to receive payment from customers (DSO = 15.6), and 17.3 days to pay suppliers (DPO = 17.3), your money for the conversion cycle will be 12.5 days (or 14.2 + 15.6 - 17.3). 

However, you might ask yourself, “What is DIO, DSO, or DPO, and how do we calculate them?”. To answer that, we will break each component into its heading and delve deeper into what each term means, how to calculate them, and how to interpret a high versus low metric.

What is Days Inventory Outstanding?

Days Inventory Outstanding, or DIO, is a ratio used in working capital management that measures the average number of days a business holds its inventory before turning it into a sale. This is the number of days a company takes to process raw materials and/or inventory and receive money from the sale.

The formula for DIO is derived from the Inventory Turnover ratio, which measures the rate at which inventory is sold and replaced. The formula for the inventory turnover ratio is

Inventory Turnover Ratio = Cost of Goods Sold (COGS)/ Average Inventory

The formula for average inventory is given as follows:

Average Inventory = (Beginning Inventory + Ending Inventory)/ 2

To find DIO, we divide 365 by inventory turnover ratio to determine the number of days a company holds its inventory before converting it into a sale. Therefore, the formula for this is given as:

DIO = 365/ (Inventory Turnover Ratio)

= 365/ (Cost of Goods Sold (COGS)/ Average Inventory)

= [Average Inventory/ Cost of Goods Sold (COGS)] * 365

The DIO metric tells you how many days it takes for inventory held to be sold.

A low DIO is positive to investors, as it takes fewer days to convert inventory into sales, whereas a higher DIO level indicates that a company is inefficient in converting inventory into sales and is holding its inventory for too long.

You want a low number for this, meaning the items haven't been on the shelves for too long, and the customers paid relatively quickly.

What are Days Sales Outstanding?

Days Sales Outstanding (DSO), or accounts receivables days, is another ratio used for working capital management. It measures the average number of days a business takes to convert its credit sales (or accounts receivables) into cash.

The formula for DSO is derived from the Accounts Receivable Turnover ratio, a ratio that measures how effective a company is at extending credits and collecting receivables. 

The formula for the Accounts Receivable Turnover Ratio is:

Accounts Receivable Turnover Ratio = Credit Sales/ Average Accounts Receivable

The formula for average accounts receivable is given as follows:

Average Accounts Receivable = [Beginning Accounts Receivable + Ending Accounts Receivable]/ 2

To find DSO, we divide 365 by the accounts receivable turnover ratio to determine the number of days it takes for a company to collect payment from a sale. Therefore, the formula for DSO is

Days Sales Outstanding = 365/ Accounts Receivable Turnover Ratio

= 365/ (Credit Sales/ Average Accounts Receivable)

= (Average Accounts Receivable/ Credit Sales) * 365

A low DSO is positive to investors, as it indicates a company takes a shorter number of days to collect payment from customers, contrasting a high DSO value, which suggests a company is taking a long time to collect payment from a sale.

What is Days Payable Outstanding?

Days Payable Outstanding (DPO), or accounts payable days, is a working capital management ratio used to measure the number of days a company takes to pay back its accounts payable.

In other words, it shows how fast the company is at paying off suppliers for inventory and procurement of goods.

The formula for DPO is derived from the Accounts Payable Turnover Ratio, a ratio that measures how effective a company is at paying off suppliers.

The formula for the Accounts Payable Turnover Ratio is given as follows:

Accounts Payable Turnover = Total Inventory Purchased/ Average Accounts Payable

To calculate the total inventory purchased, there is a formula you must employ, as there is no line on the balance sheet, income statement, or cash flow statement that displays the total inventory purchased in a particular year. 

The formula for the total inventory purchased is as follows:

Total Inventory Purchased = COGS + Ending Inventory - Beginning Inventory

The formula for average accounts payable is

Average Accounts Payable = [Beginning Accounts Payable + Ending Accounts Payable]/ 2

To find DPO, we divide 365 by the accounts payable turnover ratio to determine the number of days it takes for a company to pay off its suppliers. Therefore, the formula for DPO is

Days Payable Outstanding = 365/ (Accounts Payable Turnover Ratio)

= 365/ (Total Inventory Purchased/ Average Accounts Payable)

= (Average Accounts Payable/ Total Inventory Purchased) * 365

Generally, it is more attractive to have a higher DPO but not one that is too high. A high DPO means the company is efficient in extending the period of payment to the suppliers, but a DPO that is too high may mean the business is struggling and is unable to make the payments.

Importance of Cash Conversion Cycle (CCC)

Let's understand why this is an important measurement below:

1. Importance in Financial Management

The CCC, as discussed before, can help you accurately determine the production/sales-related time of each dollar before it is converted into cash.

It essentially measures the amount of time it takes for a company to empty its held inventory, convert an outstanding credit balance (A / R) into cash, and the length of time it takes to pay suppliers for goods/services received. As with most cash flow calculations, smaller or shorter ones are always good.

2. Identifying Operational Efficiency with CCC

Analyzing the cycle can help reveal useful information that may be blocking a certain company from efficient working capital management, such as not having tighter credit policies when extending credit to customers.

It can also be helpful to track an individual company's CCC over time, as it can demonstrate whether the business is becoming more or less efficient.

3. Growth Indicator

Over time, monitoring CCC at regular intervals can help you see how a business is growing or improving. A decreasing or steady cycle is a positive indicator to investors, as it means it takes less time to convert working capital into available cash.

However, a rising CCC may be bad news, as the company is taking a long time to convert inventory into cash sales. The cycle can also be used to develop strategies to reduce the time it takes to sell inventory, collect credit, and make payments to suppliers.

The metric considers the time it takes a business to sell its inventory, the time it takes to get paid credit extended, and the time it takes to pay bills. CCC is an important metric for companies purchasing and managing inventory as it indicates operational efficiency and financial health.

Example of the Cash Conversion Cycle

You are hired as a financial analyst solely to analyze Strings Ltd's cash flow management performance in 2020 by measuring the CCC. The following information has been given to you:

Strings Ltd 2020
Beginning Inventory $4,000
Ending Inventory $15,000
Average Accounts Receivable $12,000
COGS $25,000
Credit Sales $60,000
Average Accounts Payable $5,0000

The first step we will take is calculating DIO. As mentioned before, 

DIO = [Average Inventory/ Cost of Goods Sold (COGS)] * 365

Average Inventory = [$4,000 + $15,000]/ 2 = $9,500

DIO = $9,500/ $25,000 = 138.7 days

Our next step is to calculate DSO. As mentioned before,

DSO = [Average Accounts Receivable/ Credit Sales] * 365

DSO = [$12,000/ $60,000] * 365 = 73 days

 The final step is to calculate DPO. As mentioned before,

DPO = [Average Accounts Payable/ Total Inventory Purchases] * 365


Total Inventory Purchased = COGS  + Ending Inventory - Beginning Inventory

Total Inventory Purchased = $25,000 + $15,000 - $4,000 = $36,000

DPO = [$5,000/ $36,000] * 365 = 50.69 Days


CCC = 138.7 + 73 - 50.69 = 161 days

It is clear that Strings Ltd's working capital management is lacking, as they are taking a long time to convert inventory into sales, as well as collect their accounts receivable, but are paying their suppliers quickly.

This is a very negative sign to investors, as it indicates Strings Ltd is taking a long time to generate cash and might face insolvency and bankruptcy if not managed appropriately.

Interpreting The Cash Conversion Cycle

The CCC formula evaluates a company's working capital efficiency, indicating how quickly it converts inventory into cash while managing supplier payments.

A shorter cycle signifies effective sales and cash recovery. To assess performance, compare the company's cycle to industry peers and analyze trends. Monitoring changes over the years reveals working capital management trends.

Furthermore, comparing the company's cycle to competitors determines if it aligns with industry standards, indicating normalcy. This approach helps gauge the company's relative efficiency, enabling informed assessments of its working capital management practices.

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