Cash Conversion Cycle

The Cash Conversion Cycle, also called Cash Cycle, is the length of time it takes a company to convert its activities requiring cash back into cash returns.

Cash Conversion Cycle

The Cash Conversion Cycle, also called Cash Cycle, is the length of time it takes a company to convert its activities requiring cash back into cash returns.


Calculation of Cash Conversion Cycle

The Cash Conversion Cycle is composed of the three main working capital components:

  •     Accounts Receivable outstanding in days (ARO);
  •     Accounts Payable outstanding in days (APO); and
  •     Inventory in days (IOD).

The Cash Conversion Cycle (CCC) is equal to the time is takes to sell inventory and collect receivables less the time it takes to pay the company payables:

Cash Conversion Cycle formula:  Inventory + Accounts Receivable – Accounts Payable   

Cash Conversion Cycle Interpretation

Cash flow is one of the most important parameters of any business. Revenue and expenses are rarely constant and cash requirements need to be planned for shortfalls, seasonal factors and one time large payments. While many companies concentrate solely on their revenues and expenses to manage their cash flow, it’s usually poor management of the Cash Conversion Cycle that leads to a cash crunch in the business. 

The factors that lead to cash increase include:

  • higher revenue
  • higher profit margin
  • lower cost
  • decrease in time that accounts receivables are outstanding
  • decrease in amount of inventory
  • increase in time to pay payables

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