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Calculate cash conversion cycle

Learn about the calculate cash conversion cycle

Use the cash conversion cycle (CCC) to measure the amount of days it takes to convert inventory into cash. The CCC marks the time it takes to sell inventory and collect receivables, as well as how long before you receive a penalty on unpaid bills.

Numbers to calculate CCC

Essentially, the CCC acts as an aggregate timeframe, measuring how long it takes your business to run through the cash production cycle from beginning to end. The faster you can produce cash, the better for you and your business.

To calculate CCC, you will need to gather the following numbers:

  • Revenues

  • Cost of goods sold (COGS)

  • Initial and final inventory balances

  • Initial and final accounts receivable (AR) balances

  • Initial and final accounts payable (AP) balances

  • The number of days in the period (in this instance, we’ll take 365 as the number of days in a year)

Visit this website to learn more about the CCC and how it can help you with your finances.

Read: (Optional)Cash conversion cycle (CCC) [1]

The following formulas will help you deduce the CCC:

  1. Calculate days inventory outstanding (DIO) using this formula: (DIO =frac {Average Inventory}{Cost of Goods Sold}) x 365

  2. Calculate days sales outstanding (DSO) using this formula: (DSO =frac {Average AR}{Revenue per day})

  3. Calculate days payable outstanding (DPO) using this formula: (DPO =frac {Average AR}{COGS per day})

  4. Calculate cash conversion cycle (CCC) using this formula: (CCC = DIO + DSO – DPO)

Reduce CCC

There are three ways to reduce your CCC:

  • Shorten cycle times

  • Reduce mistakes

  • Improve business model and profit and loss

Read this article to learn about five different methods that you can use to help improve your cash flow and ensure that you have the necessary finances in order to continue running your business.

Read: (Optional)5 ways to improve your cash flow in less than 60 days [2]

The below Harvard Business Review article explores how fast your company can grow using three factors for growth. The piece very extensively elicits a framework taking three critical factors into account:

Read: (Optional)How fast can your company afford to grow? [3]

Share your thoughts

A high or low cash conversion cycle indicates a lot about your business. A potential investor or lender will be interested in checking your CCC to determine the financial status of your business.

  • What does a high, low, or a stable CCC indicate?

  • Can you take aggressive steps to maintain the CCC so that it is to your liking?

Do your research and explore some ways to keep your CCC within the limits and share your thoughts with your fellow learners.

References

1. Hayes A. Cash conversion cycle (CCC) [Internet]. Investopedia; 2020 Apr 12. Available from: https://www.investopedia.com/terms/c/cashconversioncycle.asp

2. 5 ways to improve your cash flow in less than 60 days [Internet]. Cloud CFO; 2020 Apr 12. Available from: https://cloudcfo.com.au/5-ways-to-improve-your-cashflow-in-less-than-60-days/

3. Churchill NC and Mullins J. How fast can your company afford to grow? [Internet]. Harvard Business Review; 2001 May. Available from: https://hbr.org/2001/05/how-fast-can-your-company-afford-to-grow

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Financial Analysis for Business Decisions: Cash Flow Management

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