cash conversion cycle

Cash Conversion Cycle | Formula | Analysis | Example | Calculation

Cash Conversion Cycle Definition (CCC)

Table of Contents

Cash conversion cycle (CCC) is used to find the time which is taken to cover the investment and other resource input into inventory and cash flow. Simply we can say

Cash Conversion Cycle | Formula | Analysis | Eample Calculation

that Cash conversion cycle is the calculation measure that how much time taken the inventory to sold and collects the cash from the customer.

There are 3 parts of the cash cycle in which the first part is the current inventory level and time the time which is taken by the inventory to sell. Through days inventory outstanding calculation it can be calculated.

The second level represents the current sales and the time is taken to receive cash from sales. From days sales outstanding calculation it is calculated.

The third level represents the current outstanding payable

Formula

We calculate the cash conversion cycle When we add days inventory outstanding to days sales outstanding and subtract the days payable outstanding from it that is

Cash conversion cycle= days inventory outsanding+days sales outstanding – days payable outstanding

cash conversion cycle formula

Example

Now here we give the example of Charles which is the retailer. he bought an inventory from the vendor and pay it within 10 days for purchase discount. Inventory turnover ratio for his industry is very good. He collects money within 3 days from the customer.

Days calculation for Charles are below

  • Days inventory outstanding= 18 days
  • Days sales outsanding= 5 days
  • Days payable outstanding=15

Now we calculate the Cash conversion cycle for Charles

8 days= 18+5-15

So the Cash conversion cycle for Charles is 8 days. So Charles takes 8 days to sell its inventory and get cash. It can be compared with other company to find that as compared to other company Cash conversion cycle of Charles or good or bad.

Analysis

Cash conversion cycle is used to calculate the time of the initial cash outlay for inventory to the receiving of cash from the customer. Retailer takes inventory on credit and pays cash after some days.

Inventory is marketed to customer payable of which pay for the customer within 30 days. So after the 30 days of purchasing customer pays its payable on inventory.

A company which has small Cash conversion cycle then it buys inventory and sells it and the in less time it receives cash. Small Cash conversion cycle company consider as a good company.

Cash conversion cycle is also called sales efficiency calculation because it tells how much the company is efficient to buy inventory, sells it and receive payable on that inventory.

For more Financial Ratio Check: 

Average payment period

Break-Even Point Analysis

Capitalization ratio

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