Cash conversion cycle - Screener (2024)

FAQs

How do you assess cash conversion cycle? ›

The cash cycle, or cash conversion cycle, is the time it takes for a company to convert its investments in inventory into cash flow from sales. It's measured by adding days inventory outstanding to days sales outstanding and subtracting days payable outstanding.

A company's cash conversion cycle broadly moves through three distinct stages and draws the following information from a company's financial statements. All figures are available as standard items in the statements filed by a publicly listed company as a part of its annual and quarterly reporting.

What is a good cash conversion cycle? Research indicates that the median cash conversion cycle is between 30 days and around 45 days. Aiming to reduce your cash cycle to 45 days or less would mean you turn cash into inventory and back again quicker than the average business.

Interpreting CCC Results

CCC between 30 and 60 days is average and may indicate that there is room for improvement. CCC of more than 60 days suggests the company struggles with several areas and needs to improve working capital management to survive.

Generally, a shorter cash conversion cycle indicates optimised and efficient working capital management. Ideally, a cash cycle averages between 30 to 45 days. However, these cycles can vary significantly between industries.

Cash Conversion Cycle = DIO + DSO – DPO

Where: DIO stands for Days Inventory Outstanding. DSO stands for Days Sales Outstanding. DPO stands for Days Payable Outstanding.

There can be a lag between paying your supplier or vendor and collecting payment for selling the goods. If you sell the goods before paying your supplier, you will have a negative CCC.

What Is Considered a "Good" Cash Conversion Ratio? Depending on the particular industry your enterprise is in, a good CCR will differ. In general, however, a CCR of 1 indicates that a business efficiently converts every dollar of net income to cash.

What is the cash conversion cycle in layman's terms? ›

The cash conversion cycle is a crucial metric in a business that monitors the time between expenditures made by the business and the receipt of the cash. It measures the number of days a business takes to convert their investment in inventory and other resources into cash collected from customers.

The cash conversion cycle (CCC) is a vital financial metric that quantifies the time it takes for a company to convert inventory and accounts receivable into cash. It serves as a key performance indicator (KPI) to evaluate a company's ability to sell inventory, receive payments, and settle supplier obligations.

A good cash conversion cycle is a short one. If your CCC is a low or (better yet) a negative number, that means your working capital is not tied up for long, and your business has greater liquidity.

The formula for calculating the cash conversion cycle sums up the days inventory outstanding and days sales outstanding, and then subtracts the days payable outstanding.

Optimize your inventory

The longer it takes for a business to sell its inventory, the longer the CCC is. Businesses must move inventory efficiently, building or purchasing only what they need and using all the tools available to keep the cash conversion cycle manageable.

A lower (shorter) cash conversion cycle is considered to be better because it indicates that a business is running more efficiently. It can quickly convert invested capital into cash.

The formula to calculate the cash conversion cycle is equal to the sum of days inventory outstanding (DIO) and days sales outstanding (DSO), subtracted by days payable outstanding (DPO).