Also going by the name as Cash Cycle or Net Operating Cycle, Cash Conversion Cycle (CCC) refers to a vital metric in any organizational model. CCC is aimed at measuring how long each net input amount remains tied up in the respective sales & production processes before the same gets converted into the total cash received.
The given metric is known to take into account the total time for the given organization needed to sell the inventory along with the total time the company takes to receive the collectables. It can also be used to denote the total time the company has towards paying its subsequent bills without leading to any penalty.
Cash Conversion Cycle serves to be one of the various quantitative measures that help in evaluating the overall Efficiency of the operations & management activities of the organization. A trend-following steady or decreasing CCC values over several periods serves to be a good sign for the company. On the other hand, the rising trends are required to undergo more investigation as well as analyses based on several factors. It is important to note that CCC is known to apply only to specific sectors depending on inventory management and its related operations.
As Cash Conversion Cycle is concerned with calculating the net aggregate time across multiple stages of the respective cash conversion lifecycle, its mathematical formula can be depicted as:
Cash Conversion Cycle (CCC) = DSO + DIO – DPO
Here, DIO stands for Days of Inventory Outstanding (also referred to as Days Sales of Inventory), DSO stands for Day Sales Outstanding, and DPO stands for Day Payable Outstanding.
Both DIO & DSO are known to be associated with the cash inflows of the company. On the other hand, DPO is associated with the respective cash outflow. Therefore, DPO is regarded as a negative figure in the given calculation.
The CCC of an organization is known to move across three unique stages. For calculating CCC, you are required to be in possession of multiple components from the respective financial statements. These are:
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Boosting the overall sales of inventory for attaining profits is the main way for organizations to ensure more Earnings. CCC helps in tracing the lifecycle of cash that is being utilized for the respective activities.