ash Conversion Cycle
The Cash Conversion Cycle (CCC) is a vital metric that measures the time it
takes for a company to convert its investments in inventory into cash flows
from sales.
By understanding and optimizing the CCC, businesses can improve their
liquidity and operational efficiency.
Definition:
The CCC is the period it takes to convert resource inputs into cash flows. It
combines the time taken to sell inventory, collect receivables, and pay
suppliers.
Components and Formulas:
1. 𝗗𝗮𝘆𝘀 𝗜𝗻𝘃𝗲𝗻𝘁𝗼𝗿𝘆 𝗢𝘂𝘁𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 (𝗗𝗜𝗢): The average number of days it
takes to sell inventory.
DIO} = Average Inventory / Cost of Goods Sold x 365
2. 𝗗𝗮𝘆𝘀 𝗦𝗮𝗹𝗲𝘀 𝗢𝘂𝘁𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 (𝗗𝗦𝗢): The average number of days it takes
to collect payment after a sale.
DSO} = Accounts Receivable / Sales x 365
3. 𝗗𝗮𝘆𝘀 𝗣𝗮𝘆𝗮𝗯𝗹𝗲 𝗢𝘂𝘁𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 (𝗗𝗣𝗢): The average number of days it
takes to pay suppliers.
DPO} = Accounts Payable / Sales x 365
Formula:
CCC = DIO} + DSO - DPO
Example:
Take Amazon, for instance. In 2020, Amazon had a DIO of 39.2 days, a DSO
of 18.5 days, and a DPO of 95.1 days. Plugging these into the formula:
CCC} = 39.2 + 18.5 - 95.1 = -37.4 days
Interpretation:
A negative CCC, as seen with Amazon, indicates that the company receives
cash from sales before it needs to pay its suppliers.
This is highly advantageous as it suggests Amazon is effectively using its
suppliers' capital to finance its operations, enhancing liquidity and reducing
the need for external financing.
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