Mastering the Cash Conversion Cycle


The assets convertible into cash without the slightest decrease in market price is a company’s liquidity cash. Running a business sounds great, but it is a bed of thrones equally decorated with benefits and drawbacks. Moreover, a precise evaluation of a company’s liquidity is vital because a decline in liquidity leads to a higher chance of bankruptcy. 

A company without revenue is as motionless as a paralyzed person. Liquidity is an imperative factor for a business to operate successfully. Financiers and bankers traditionally look to the company’s financial and balance statement to estimate the synchronous or expeditious ratio to gauge liquidity. However, another lesser-known metric is the cash conversion cycle (CCC), sometimes called the net operating cycle.

The cash conversion cycle is a metric that calculates the number of days or time required for a company to convert its investment into valuable assets and merchandise from the generated sales. Although, you can calculate the cash conversion cycle by employing the following:

  • How long does it take to promote and sell your business goods?
  • How quickly can you gather accounts receivable?
  • What is the turnaround time for reimbursing bills payable?

Three factors are involved with each cash conversion cycle:

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Day’s Inventory Outstanding (DIO)

DIO is the average time required for a company to convert its merchandise into competitive market goods and then sell them in the market. Overall, the calculation of DIO is uncomplicated. You must exert the aggregate of your inventory, divide it by the cost of goods sold, and multiply it by 365.

Day’s Sales Outstanding (DSO)

DSO is the average number of days required to collect your account receivables. To calculate the DSO, take the average of the days needed to manage the receivables of the amount, divide it by the net credit sales, and multiply it by 365.

Days Payable Outstanding (DPO)

DPO involves the average number of days required for your business to purchase merchandise from vendors and then make their receivables. Moreover, the end amount received is divided by the cost of sold goods and 365.

You can calculate the Cash Conversion Cycle of your company using the following basic formula given below:



  • DIO = Days of inventory outstanding (also known as days sales of inventory)
  • DSO = Day’s sales outstanding
  • DPO = Day’s payables outstanding


Importance of Cash Conversion Cycle

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Estimation of the Cash Liquidity

The cash conversion cycle’s prime focus is its crucial role in estimating a business’s financial condition and credit health. Overall, the entire process has also been proven to detect any industry’s liquidity and goods assessments.

Low Cash Conversion Cycle

A low or negative cash conversion cycle indicates that you are working very well in converting your investment to merchandise and later into revenue. Furthermore, it also proves that you are striving competently.

High Cash Conversion Cycle

A too-high or positive cash conversion cycle indicates that your business is struggling with operational issues and that market demand for your product is rapidly declining. 

Estimation of Cash That You Can Ask for Lending

The cash conversion cycle is critical because it is a step ahead in providing ease to business owners despite countless downsides. Overall, this cycle helps to evaluate the amount of cash you can borrow from the lenders to score higher in the corporate world. 

To Maintain the Cash Collection Method of the Company

Internal management is the base of a sustainable and profit-generating business. Therefore, the Cash Conversion Cycle maintains the company’s core aspects and helps adjust lenders’ credit statements. 

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The cash conversion cycle estimates the time required for the production and sales process before it gets changed into cash received. The conversion of each net dollar is linked to CCC. Overall, the calculation of CCC involves three main steps, as it involves the aggregate time spent in the entire process of liquidity of cash of a successfully operating business.

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