﻿What is the Cash Conversion Cycle? CCC Explained | Novuna

# Cash conversion cycle

## What is the cash conversion cycle?

The cash conversion cycle (CCC) is a critical metric that businesses use to evaluate their financial performance. Understanding the cash conversion cycle is essential for managing cash flow effectively and optimising a company's financial operations. In this blog, we will explore the concept of the cash conversion cycle and how it can be used to analyse a company's financial health.

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## Key takeaways

• The cash conversion cycle (CCC) is a metric that measures the amount of time it takes for a company to convert its inventory and other resources into cash flow.
• The CCC is calculated by adding the number of days it takes for a company to sell its inventory, the number of days it takes for a company to collect its accounts receivable, and the number of days it takes for a company to pay its accounts payable.
• A negative CCC indicates that a company is able to convert its resources into cash flow more quickly than it takes to pay its suppliers, which can be a sign of good financial health.
• A positive CCC indicates that a company takes longer to convert its resources into cash flow than it takes to pay its suppliers, which can be a sign of financial risk.
• The CCC can be used to identify inefficiencies in a company's financial operations and to optimise cash flow management.

## Understanding the cash conversion cycle

The cash conversion cycle (CCC) is a financial metric that measures the amount of time it takes for a company to convert its inventory and other resources into cash flow.

The cash conversion cycle is an important indicator of a company's ability to manage its cash flow effectively, and is calculated by adding the number of days it takes for a company to sell its inventory, the number of days it takes for a company to collect its accounts receivable, and the number of days it takes for a company to pay its accounts payable.

## Calculating the cash conversion cycle

### Days inventory outstanding (DIO)

The number of days it takes for a company to sell its inventory. This metric is calculated by dividing the cost of goods sold by the average inventory level and multiplying the result by 365.

### Days sales outstanding (DSO)

The number of days it takes for a company to collect its accounts receivable. This metric is calculated by dividing the average accounts receivable by the average daily sales and multiplying the result by 365.

### Days payable outstanding (DPO)

The number of days it takes for a company to pay its accounts payable. This metric is calculated by dividing the average accounts payable by the average daily purchases and multiplying the result by 365.

## What is the formula for the cash conversion cycle?

Once you have the 3 components of the cash conversion cycle, you can calculate the CCC using the following formula:

### CCC = DIO + DSO - DPO

The result will either be positive or negative...

### A negative cash conversion cycle

• A negative cash conversion cycle indicates that a company is able to convert its resources into cash flow more quickly than it takes to pay its suppliers, which can be a sign of good financial health.
• A company with a negative cash conversion cycle can use the excess cash to invest in growth opportunities or pay down debt.

### A positive cash conversion cycle

• A positive cash conversion cycle indicates that a company takes longer to convert its resources into cash flow than it takes to pay its suppliers, which can be a sign of financial risk.
• A company with a positive cash conversion cycle may need to secure additional financing to support its operations.

## Example of how to use the cash conversion cycle

Let's take a hypothetical example of a company that sells widgets. The company has an inventory turnover ratio of 5, an accounts receivable turnover ratio of 6, and an accounts payable turnover ratio of 4.

We can use these ratios to calculate the company's CCC:

• DIO = 365 / 5 = 73 days
• DSO = 365 / 6 = 61 days
• DPO = 365 / 4 = 91 days
• CCC = 73 + 61 - 91 = 43 days

This means that it takes the company 43 days to convert its inventory and accounts receivable into cash flow, after taking into account the time it takes to pay its suppliers.

If the company's CCC is higher than its industry average, it may indicate that the company is not managing its cash flow effectively and may need to make changes to its operations.

## Have you ever thought about invoice finance to help improve your cash flow?

Invoice finance allows you to release cash quickly from your unpaid invoices.

As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.

We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.

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## The benefits of invoice finance companies such as Novuna Business cash flow

• Boost your cash flow without having to wait up to 120 days for your customers to pay you

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## Want to understand more Cash Flow Finance terms?

Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.

We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.

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