Cash Conversion Cycle (CCC)

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Definition of 'Cash Conversion Cycle (CCC)'

The cash conversion cycle (CCC) is a measure of how long it takes a company to turn its inventory into cash. It is calculated by subtracting the days of inventory outstanding (DIO) from the days of sales outstanding (DSO) and adding the days of payables outstanding (DPO).

The CCC is an important metric for understanding a company's liquidity and cash flow. A shorter CCC means that a company is more efficient at turning its inventory into cash, which can lead to improved profitability. A longer CCC can indicate that a company is having trouble managing its inventory or collecting its receivables, which can lead to cash flow problems.

The CCC can be used to compare companies within the same industry to see which one is more efficient at managing its cash flow. It can also be used to track a company's CCC over time to see if it is improving or getting worse.

The CCC is calculated using the following formula:

CCC = DIO + DSO - DPO

Where:

* DIO = Days of inventory outstanding
* DSO = Days of sales outstanding
* DPO = Days of payables outstanding

The DIO is the average number of days that inventory sits on the shelves before it is sold. The DSO is the average number of days that it takes a company to collect its receivables. The DPO is the average number of days that a company takes to pay its suppliers.

To calculate the DIO, you need to divide the average inventory balance by the cost of goods sold per day. To calculate the DSO, you need to divide the accounts receivable balance by the average daily sales. To calculate the DPO, you need to divide the accounts payable balance by the average daily purchases.

Once you have calculated the DIO, DSO, and DPO, you can plug them into the formula to calculate the CCC.

The CCC is a valuable tool for understanding a company's liquidity and cash flow. However, it is important to note that the CCC is only one metric and should not be used in isolation. Other factors, such as a company's debt levels and capital structure, should also be considered when assessing a company's financial health.

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