Cash Conversion Cycle
Days inventory outstanding (DIO) plus days sales outstanding (DSO) minus days payable outstanding (DPO). The number of days between paying suppliers and collecting from customers.
When to use: A holistic working-capital efficiency measure — captures the entire cash cycle. Lower (or negative) is better: less time between cash going out and coming in means less working capital required. Combined with growth, falling CCC signals operational improvement.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| CCC | Cash Conversion Cycle | DSO + DIO − DPO (days) | integer |
| DSI | Days Inventory Outstanding (DIO) | Average days to sell inventory | integer |
| DSO | Days Sales Outstanding | Average days to collect receivables | integer |
| DPO | Days Payable Outstanding | Average days to pay suppliers | integer |
Real-Life Examples
Example 1: Manufacturer
DIO 60 days, DSO 45 days, DPO 30 days.
Given
Step-by-Step
75-day cash conversion cycle — typical for manufacturing. Funding 75 days of operations between paying suppliers and collecting customer payments. Reduce by improving inventory turns, accelerating collections, or stretching payables.
Example 2: Negative-CCC Retailer (e.g. Costco)
DIO 30, DSO 4 (cash sales mostly), DPO 50.
Given
Step-by-Step
Negative CCC — the firm collects from customers 16 days BEFORE it has to pay suppliers, effectively financed by its supply chain. The hallmark of high-velocity, fast-pay retail.
Frequently Asked Questions
DIO = (Inventory / COGS) × 365. DSO = (Receivables / Sales) × 365. DPO = (Payables / COGS) × 365. Each is the same conceptually: average balance ÷ daily flow.
It means the business runs on supplier credit — customers pay before suppliers do. This lets the firm grow without raising external working capital. Common in grocery, e-commerce platforms, and quick-service restaurants. A sign of bargaining power.