Cash conversion cycle

Cash conversion cycle or CCC is the time duration in which a firm is able to convert its resources into cash. It is actually the total time period required to first convert resources into inventories, then inventories into finished goods, then goods into sales, and then sales into cash. Here the resource may include raw material, labour, power and fuel, etc.

In other words, it can be defined as the time taken to collect cash from sales after making payments for resources acquired by the firm. It should be noted that in many cases, sales can be made on credit and purchasing of resources also does not immediately requires cash payments, so the difference should be taken into account between the actual cash collection and sales/purchasing.

Basic formula

CCC = Inventory conversion period (in days) + Receivables conversion period (in days) – Payables conversion period (in days)

• Inventory conversion period = (Inventory/COGS)*365 or 366 in a leap year
• Receivables conversion period = (Receivables/Sales)*365
• Payables conversion period = (Payables/COGS)*365

Comments

• Any business selling for cash, such as a supermarket, has no receivables and so has a smaller CCC;
• Non-manufacturing businesses, such as consultancies, has no inventories and so has a smaller CCC;
• CCC can be negative if a business pays its creditors after it purchases inputs, manufactures goods, sells them, and collects cash;
• CCC is a part of working capital analysis.

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