Cash conversion cycle (CCC)

The formula

• CCC = DIO + DSO − DPO

Goods wait in stock for DIO days and the invoice waits with the customer for DSO days; the supplier waits DPO days for the company’s own payment. The cash goes out when the supplier is paid and comes back when the customer pays, and the gap is the cycle.

A worked example

Stock sells in 60 days, customers pay in 45 and suppliers are paid in 40: CCC = 60 + 45 − 40 = 65 days. For sixty-five days the money spent on goods is tied up before it returns as a payment. Turned round, a company that wants a 30-day cycle with the same stock and customers would need 75 days of supplier credit.

Why it matters

The cycle is the working capital the business needs, expressed in days: a company selling 1,000 a day at cost with a 65-day cycle has 65,000 of its own money permanently out on the shelf and in customers’ hands. Growing sales at the same cycle means finding more of it. Shortening the cycle, by faster collection, less stock or longer supplier terms, releases cash without a single extra sale.

A negative cycle

A supermarket sells goods for cash within days and pays the supplier weeks later: DIO + DSO is small and DPO large, and the cycle is negative. The customers finance the stock, and growth brings cash in rather than tying it up. Subscription businesses paid in advance work the same way.

Common mistakes

• Adding DPO instead of subtracting it. Supplier credit shortens the cycle.
• Taking the three counts from different periods. All three need the same period and the same day count.
• Reading a short cycle as health on its own. A cycle shortened by paying suppliers late has a cost elsewhere.

Frequently asked questions