Calculating a Company’s CCC
This calculator can be used to determine a company’s cash conversion cycle, also referred to as CCC. The calculator needs a total of nine inputs, including:
- Whether the information timeframe is weekly, monthly, quarterly, or annually
- The revenues collected in the indicated timeframe
- The cost of goods sold associated with the revenues
- The inventory at the beginning of the timeframe
- The inventory at the end of the indicated timeframe
- The accounts receivable at the beginning of the timeframe
- The accounts receivable at the end of the indicated timeframe
- The accounts payable at the beginning of the timeframe
- The accounts payable at the end of the indicated timeframe
The calculator then provides the user with four outputs:
- The days of inventory outstanding, or DIO
- The days of sales outstanding, or DSO
- The days of payables outstanding, or DPO
- Finally, the company’s cash conversion cycle, or CCC
Why is a Company’s Cash Conversion Cycle Important?
Before answering why a company’s cash conversion cycle is important, we’re going to explain the three metrics that are used to calculate this value. The first value we’ll look at is days inventory outstanding, also referred to as DIO. This measure is calculated by finding the average inventory (beginning plus ending inventory divided by two) and then dividing this value by the cost of goods sold. This value is normalized by dividing it by the number of days in the timeframe examined. DIO tells us the average number of days it takes for the capital tied up in inventory to turn into a sale. The less time capital sits in inventory, the better, which means lower values of DIO are desirable.
The next metric we’ll look at is days sales outstanding, or DSO. This measure is found by finding the average balance in accounts receivable (beginning plus ending accounts receivable divided by two) and then dividing this value by revenues. This value is normalized by dividing it by the number of days in the timeframe examined. DSO tells us the average number of days it takes to collect the money owed from the consumer after a sale. The faster money is collected, the better, which means lower values of DSO are also desirable.
The last metric used to calculate the cash conversion cycle is days payable outstanding, or DPO. As was the case with DIO and DSO, DPO is found by taking the average balance in accounts payable (beginning plus ending accounts payable divided by two) and then dividing this value by the cost of goods sold. Here again, the value is normalized the same way as DIO and DSO. Days payable outstanding tells us the average number of days it takes for a company to pay bills owed creditors such as suppliers. As you may have guessed, higher values of DPO are desirable. While a company wants to collect money as quickly as possible, it also wants to pay its bills as slowly as possible.
Calculating Cash Conversion Cycle
A company’s cash conversion cycle, or CCC, is calculated by adding DIO to DSO. This represents the time cash is tied up first in inventory before a sale is made, then the days it takes to collect the money from a customer after the sale. Businesses always want to keep their cash working, especially working capital, so the shorter this timeframe, the faster they can get the money working again. From the sum of DIO and DSO we subtract DPO to find CCC.
Why do we subtract DPO when calculating CCC? Because when a supplier provides a business with something (like raw materials), it is effectively loaning that company an asset until the company pays for the goods or services. For example, those raw materials could be used to create inventory. Since DPO effectively creates working capital for the business, it is subtracted from DIO and DSO. CCC gives a business insight into the flow of working capital and the three levers (collections, keeping inventory as low as possible, and delaying the payment of bills as long as possible) it can use to optimize their use of cash.