How fast can you grow your business? This depends on how well you convert your sales into cash-in-hand. Is this conversion slow? You will need cash from other sources to fund your growth in sales volume and pay expenditures. Some expenditures will be for goods and services, others for capital items. The Cash Conversion Cycle assesses how you are going. It is an important metric for fast growing businesses. Blue Belt
Knowing how your cashflow is going is important.
You need some way of measuring it.
One measurement is the Cash Conversion Cycle (CCC).
This is a single metric condensing the impact of how fast a business can:
1. Convert cash on hand into inventory - incurs accounts payable to suppliers.
2. Sell the new inventory - convert them to accounts receivable from buyers.
3. Recover the money owed from the buyers - the extra inventory from suppliers converts into cash.
CCC is a measure of the effectiveness of a company’s management and the overall health of the company.
Like many metrics, calculating it once will not give you very much information.
The real value will come from calculating it periodically (say each quarter).
Look for any trend up or down.
- If the number is falling:
- You are getting better at cashflow management.
- If the number is increasing:
- You are getting worse and remedial action needs to start.
The formula for calculating CCC is:
- DIO: Days of Inventory = how long you hold inventory before selling.
- DSO: Days of Sales Outstanding = an estimate of how long it takes your customers to pay you.
See the Daily Sales Outstanding Metric article for calculations.
- DPO: Days Payables Outstanding = the number of days you take to pay your suppliers.
See the Daily Sales Outstanding Metric article and scroll down to Daily Payables Outstanding for calculations.
Investopedia has an excellent article to further your knowledge on the Cash Conversion Cycle.
The article has detailed examples showing the calculations for CCC=DIO+DSO-DPO
Cash Conversion Cycle CCC - Definition - Reviewed by Adam Hayes - updated June 27 2019
Refer to other articles on improving cashflow - Cashflow menu.