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What is the Cash Conversion Cycle?

The cash conversion cycle (CCC) measures how many days a business's cash is tied up in operations, from paying suppliers for inventory to collecting payment from customers. It combines inventory days, receivable days and payable days, and a shorter cycle means the business turns its cash over faster.

The cycle has three parts: how long inventory sits before it is sold, how long customers take to pay, and how long the business takes to pay its own suppliers. The first two consume cash; the third provides it. The formula is inventory days plus receivable days minus payable days. If a business holds stock for forty days, waits thirty days to be paid, and pays suppliers after twenty days, its cycle is fifty days.

Why it matters: every day of that cycle is a day the business's cash is locked up and cannot be used for payroll, rent or growth. A shorter cycle means the business can fund more activity with the same cash. The levers are straightforward: sell inventory faster, collect receivables sooner, and, where it does not damage supplier relationships or cost more in late fees, extend payment terms.

Example

A wholesaler holds stock for forty days, its customers pay after thirty days, and it pays suppliers after twenty days. Its cash conversion cycle is fifty days, meaning cash spent on inventory returns to the business roughly fifty days later.

Questions

What is the formula for the cash conversion cycle?

The cash conversion cycle equals days of inventory outstanding plus days sales outstanding minus days payable outstanding. Each component is a simple ratio of the relevant balance to daily cost or revenue.

How can a business shorten its cash conversion cycle?

Sell inventory faster, collect from customers sooner with clear terms and prompt invoicing, and negotiate longer payment terms with suppliers where it is sensible. Each day removed from the cycle is a day of cash released back into the business.

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