The Cash Conversion Cycle (CCC) is a metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash from sales. It takes into account the amount of time it takes to sell inventory, collect accounts receivable, and pay off obligations to suppliers. The shorter the CCC, the quicker a company can turn its resources into cash, indicating more efficient use of its resources and potentially better liquidity.

## How to Calculate Cash Conversion Cycle (Step-by-Step)

**The Cash Conversion Cycle (CCC) can be calculated using the following formula:**

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)

**Where:**

- Days Inventory Outstanding (DIO) = Average Inventory / Cost of Goods Sold (COGS) * 365 days
- Days Sales Outstanding (DSO) = Accounts Receivable / (Annual Sales / 365 days)
- Days Payable Outstanding (DPO) = Accounts Payable / (Annual Cost of Goods Sold / 365 days)

**Step-by-Step calculation:**

- Calculate Days Inventory Outstanding (DIO): Divide the average inventory for a specific period by the cost of goods sold for that same period and then multiply the result by 365 days to determine the number of days it takes to sell the inventory.
- Calculate Days Sales Outstanding (DSO): Divide the accounts receivable for a specific period by the annual sales for that same period divided by 365 days. This gives you the number of days it takes to collect payment from customers.
- Calculate Days Payable Outstanding (DPO): Divide the accounts payable for a specific period by the annual cost of goods sold for that same period divided by 365 days. This gives you the number of days a company takes to pay its suppliers.
- Calculate Cash Conversion Cycle: Add together the Days Inventory Outstanding (DIO), and Days Sales Outstanding (DSO), and subtract the Days Payable Outstanding (DPO) to get the Cash Conversion Cycle. A positive number indicates that a company is taking longer to convert its resources into cash, while a negative number indicates that a company is converting its resources into cash more quickly.

## How to Interpret Cash Conversion Cycle (High vs. Low)

A high Cash Conversion Cycle (CCC) indicates that it takes a longer time for a company to convert its investments in inventory and other resources into cash from sales, whereas a low CCC suggests a shorter conversion time.

A high CCC can be interpreted as a sign of inefficiency in a company’s operations, as it suggests that the company is taking too long to sell its inventory and collect payment from customers, and is also paying its suppliers too slowly. This can lead to a strain on the company’s liquidity and working capital.

A low CCC, on the other hand, indicates that a company is efficiently converting its investments into cash, and has a good balance between inventory turnover, accounts receivable collection, and accounts payable payment. This can result in stronger liquidity and a healthier balance sheet.

It is important to note that a low CCC is not always a positive sign, as a company may be sacrificing supplier relationships and payment terms in order to achieve a lower CCC. In general, a CCC that is in line with industry averages is considered to be a healthy and balanced figure.

## Cash Conversion Cycle Formula

**The formula for the Cash Conversion Cycle (CCC) is:**

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)

**Where:**

- Days Inventory Outstanding (DIO) = Average Inventory / Cost of Goods Sold (COGS) * 365 days
- Days Sales Outstanding (DSO) = Accounts Receivable / (Annual Sales / 365 days)
- Days Payable Outstanding (DPO) = Accounts Payable / (Annual Cost of Goods Sold / 365 days)

The CCC measures the number of days it takes for a company to convert its investments in inventory and other resources into cash from sales, taking into account the time it takes to sell inventory, collect accounts receivable, and pay off obligations to suppliers. A positive number indicates that a company is taking longer to convert its resources into cash, while a negative number indicates that a company is converting its resources into cash more quickly.

## Negative Cash Conversion Cycle – Amazon (AMZN) Example

A negative Cash Conversion Cycle (CCC) indicates that a company is able to convert its investments in inventory and other resources into cash from sales more quickly than it takes to pay off its obligations to suppliers. This can result in stronger liquidity and a healthier balance sheet.

For example, Amazon (AMZN) has historically maintained a negative CCC, which is a testament to the company’s efficient operations and strong cash flow. Amazon’s high volume of sales and ability to collect payment from customers quickly, combined with its efficient inventory management and prompt payment to suppliers, result in a negative CCC.

It’s worth noting that a negative CCC is not always a positive sign, as a company may be sacrificing supplier relationships and payment terms in order to achieve a lower CCC. However, in Amazon’s case, the company’s efficient operations and strong financial position allow it to maintain a negative CCC while still maintaining strong relationships with suppliers and vendors.

## Cash Conversion Cycle Calculator – Excel Template

A Cash Conversion Cycle (CCC) calculator can be easily created in Microsoft Excel using the formula provided in my previous answer:

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)

**Where:**

- Days Inventory Outstanding (DIO) = Average Inventory / Cost of Goods Sold (COGS) * 365 days
- Days Sales Outstanding (DSO) = Accounts Receivable / (Annual Sales / 365 days)
- Days Payable Outstanding (DPO) = Accounts Payable / (Annual Cost of Goods Sold / 365 days)

**To create a CCC calculator in Excel, you can follow these steps:**

- Create a new Excel worksheet
- In cell A1, label the first column “Metric”
- In cell B1, label the second column “Value”
- In cell A2, enter “Average Inventory”
- In cell B2, enter the average inventory figure for a specific period
- In cell A3, enter “Cost of Goods Sold (COGS)”
- In cell B3, enter the COGS figure for the same period as the average inventory
- In cell A4, enter “Accounts Receivable”
- In cell B4, enter the accounts receivable figure for the same period
- In cell A5, enter “Annual Sales”
- In cell B5, enter the annual sales figure for the same period
- In cell A6, enter “Accounts Payable”
- In cell B6, enter the accounts payable figure for the same period
- In cell A7, enter “Annual Cost of Goods Sold”
- In cell B7, enter the annual cost of goods sold figure for the same period
- In cell A8, enter “Days Inventory Outstanding (DIO)”
- In cell B8, enter the formula for DIO: =B2/B3*365
- In cell A9, enter “Days Sales Outstanding (DSO)”
- In cell B9, enter the formula for DSO: =B4/(B5/365)
- In cell A10, enter “Days Payable Outstanding (DPO)”
- In cell B10, enter the formula for DPO: =B6/(B7/365)
- In cell A11, enter “Cash Conversion Cycle (CCC)”
- In cell B11, enter the formula for CCC: =B8+B9-B10

The CCC calculator in Excel will now automatically calculate the CCC based on the input data and will update the result whenever the input data changes. This can be a useful tool for tracking a company’s CCC over time and comparing it to industry averages.

## Cash Conversion Cycle Calculation Example

Here’s an example of how to calculate the Cash Conversion Cycle (CCC) using the formula provided in my previous answer:

**Where:**

- Days Inventory Outstanding (DIO) = Average Inventory / Cost of Goods Sold (COGS) * 365 days
- Days Sales Outstanding (DSO) = Accounts Receivable / (Annual Sales / 365 days)
- Days Payable Outstanding (DPO) = Accounts Payable / (Annual Cost of Goods Sold / 365 days)

**Let’s assume the following figures for a specific period:**

- Average Inventory = $100,000
- Cost of Goods Sold (COGS) = $500,000
- Accounts Receivable = $200,000
- Annual Sales = $1,000,000
- Accounts Payable = $150,000
- Annual Cost of Goods Sold = $1,000,000

**To calculate the CCC:**

- Calculate DIO: $100,000 / $500,000 * 365 days = 73.2 days
- Calculate DSO: $200,000 / ($1,000,000 / 365 days) = 182.5 days
- Calculate DPO: $150,000 / ($1,000,000 / 365 days) = 137.0 days
- Calculate CCC: 73.2 days + 182.5 days – 137.0 days = 119.7 days

The result indicates that it takes the company 119.7 days to convert its investments in inventory and other resources into cash from sales, taking into account the time it takes to sell inventory, collect accounts receivable, and pay off obligations to suppliers.