Cash Conversion Cycle (CCC) What is the CCC? The cash conversion cycle (CCC) measures the number of days a company’s cash is tied up in the operating cycle — from purchasing inventory to collecting cash from sales — after accounting for the time it defers payments to suppliers. A shorter CCC indicates more efficient working-capital management; a negative CCC means a company collects cash before it must pay suppliers. Formula CCC = DIO + DSO − DPO Explore More Resources
Where:
DIO = Days Inventory Outstanding
DSO = Days Sales Outstanding
* DPO = Days Payables Outstanding Components and how to calculate them All inputs are generally available in a company’s financial statements. Use 365 days for annual calculations (or 90 for a quarter). Explore More Resources
Days Inventory Outstanding (DIO)
Measures how long inventory sits before being sold.
DIO = (Average Inventory ÷ Cost of Goods Sold) × 365
Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2 Days Sales Outstanding (DSO)
Measures how long it takes to collect cash from sales.
DSO = (Average Accounts Receivable ÷ Revenue) × 365
Average Accounts Receivable = (Beginning AR + Ending AR) ÷ 2 Explore More Resources
Days Payables Outstanding (DPO)
Measures how long the company takes to pay suppliers.
DPO = (Average Accounts Payable ÷ Cost of Goods Sold) × 365
* Average Accounts Payable = (Beginning AP + Ending AP) ÷ 2 Worked example If DIO = 50 days, DSO = 30 days, and DPO = 40 days:
CCC = 50 + 30 − 40 = 40 days
This means cash is tied up for 40 days on average. Explore More Resources
How to interpret CCC
* Lower CCC = cash is converted back into the business faster → generally better.
* Higher CCC = cash is tied up longer in inventory or receivables or paid out too quickly → potential liquidity strain.
* Negative CCC = company receives cash from customers before paying suppliers (common among certain retailers/platforms) and can be a competitive advantage if sustainable.
Industry differences and examples
* Retailers and distributors: CCC is especially relevant because they manage physical inventory (e.g., large supermarket chains).
* E-commerce platforms: Can have negative CCC when they collect payments immediately and pay third-party sellers on a delayed schedule.
* Service, software, insurance, and brokerage firms: CCC is often less relevant because they don’t hold significant physical inventory.
What affects the CCC Key drivers:
Inventory management — faster inventory turnover reduces DIO.
Credit terms and collection — tighter credit control and faster collections reduce DSO.
Supplier payment terms — negotiating longer payment terms increases DPO and shortens CCC. Relation to liquidity and operating performance CCC provides insight into working-capital efficiency and short-term liquidity:
A shorter CCC improves available cash for operations and investment.
CCC should be evaluated alongside liquidity ratios (current ratio, quick ratio) and profit metrics (ROE, ROA).
When comparing peers, consider industry norms and business model differences. Explore More Resources
Practical guidance
* Compare CCC over time to spot improvements or deterioration in working capital.
* Benchmark CCC against industry peers rather than across unrelated sectors.
* Investigate the drivers behind changes (inventory buildup, slower collections, tighter supplier terms) before drawing conclusions.
* Be cautious: an unusually low or negative CCC can reflect strong operations or aggressive supplier terms that may not be sustainable.
Bottom line The CCC distills how quickly a company converts investments in inventory and receivables back into cash after accounting for payables. It’s a useful, intuitive metric for assessing working-capital efficiency, but must be interpreted in context — trending and industry comparisons matter most.