Cash Conversion Cycle Calculator

Have you recently started a business and are looking for ways to optimize your operations? A cash conversion cycle calculator is one useful tool to help you do so.

The cash conversion cycle (CCC) is a metric that business owners utilize to assess how healthy their company’s cash flow (net operating cycle) is.

Read on to learn about the cash conversion cycle calculation formula, each of the formula’s components, and how you can use the calculated figure to gauge how well your business is faring.

What Is the Cash Conversion Cycle?

The cash conversion cycle (CCC) is an indicator that businesses use to assess the health of their cash flow. It’s also referred to as the net operating cycle.

In essence, this KPI measures the duration in which a company can successfully transform the capital it has invested in non-cash assets, such as inventory, into cash coming in from sales.

There are several factors that go into assessing the cash conversion cycle. This includes the time between acquiring and selling inventory, how promptly the company collects receivables from credit customers, and the time the organization has to fulfill its payables.

Cash Conversion Cycle Formula

The formula for calculating your business’s cash conversion cycle is as follows:

Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO)

How to Calculate the Cash Conversion Cycle?

To calculate the CCC using the formula above, you need to understand each component it includes.

Days Inventory Outstanding (DIO)

Your company’s DIO is the average duration it takes you to convert inventory into sales revenue. This metric is usually calculated in days.

Here’s how to calculate your DIO:

DIO = (Average Inventory/Cost of Goods Sold) x 365

To calculate your average inventory, use the following formula:

(Starting Inventory + Ending Inventory) / 2

Days Sales Outstanding (DSO)

The DSO is the time, in days, it takes your company to collect receivables from credit buyers. In essence, it informs you of the average duration between making a sale and receiving the money for it.

The DSO formula is as follows:

DSO = (Average Accounts Receivable / Total Credit Sales) x 365

Here’s how you calculate average accounts receivable:

(Starting Accounts Receivable + Ending Accounts Receivable) / 2

Days Payable Outstanding (DPO)

The DPO measures the average duration it takes to fulfill your financial obligations to creditors. Like the DIO and DSO, the DPO is calculated in days.

Here’s how to do so:

DPO = (Average Accounts Payable / Cost of Goods Sold) x 365

Here’s how you calculate average accounts payable:

(Starting Accounts Payable + Ending Accounts Receivable) / 2

Putting it All Together

Once you’ve calculated the DIO, DSO, and DPO, plug the numbers into the cash conversion cycle formula mentioned in the previous section.

Alternatively, you can use the Calcopolis cash conversion cycle calculator for an easier and quicker calculation.

What Does the Cash Conversion Cycle Tell You?

Generally speaking, a shorter CCC means better liquidity.

Some people are under the misconception that there’s a unified ideal CCC figure that means your company is doing well. In reality, the figure representing a healthy cash flow varies greatly depending on the industry you operate in.

You’ll find it more useful to compare your CCC to that of other companies in your industry. This comparison will give you a better sense of how well your business is doing.

One advantage of the CCC is that you can assess each of its formula’s components separately. This makes it easy to find the source of your problems in the event that your CCC is too high.

With that in mind, if you’re searching for a tool that can help you calculate your CCC and improve your company’s efficiency of operations, look no further than the Calcopolis cash conversion cycle calculator.

Our calculator will allow you to get a clear vision of your business’s cash flow situation and will provide insights on how to improve it.

Authors

Created by Lucas Krysiak on 2023-04-13 11:41:02 | Last review by Mike Kozminsky on 2023-04-13 13:02:39