Cash Conversion Cycle

Cash conversion cycle

The length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable.

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cash conversion cycle

The time required for a business to turn purchases into cash receipts from customers. A short cycle allows a business to quickly acquire cash that can be used for additional purchases or debt repayment.

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Cash Conversion Cycle

The time between an expenditure of money to make a product and the collection of accounts receivable from the sale of that product. Obviously, a shorter cash conversion cycle is preferable. A longer cash conversion cycle may indicate a current or potential problem with cash flow.

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Cash Conversion Cycle (CCC)

What Does Cash Conversion Cycle (CCC) Mean?

A metric that expresses the length of time in days that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its bills without incurring penalties. Also known as the cash cycle. It is calculated as follows: CCC = DIO + DSO - DPO

Where DIO represents days inventory outstanding, DSO represents days sales outstanding, and DPO represents days payable outstanding.

Investopedia explains Cash Conversion Cycle (CCC)

Usually a company acquires inventory on credit, which results in accounts payable. A company also can sell products on credit, which results in accounts receivable. Cash therefore is not involved until the company collects its accounts receivable and pays its accounts payable. The cash conversion cycle measures the time between the outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. CCC highlights how quickly a company can convert its products into cash through sales. The shorter the cycle is, the less time capital is tied up in the business process and thus the better it is for the company's balance sheet. Remember, cash is king.

Related Terms:
• Accounts Receivable
• Cash and Cash Equivalents—CCE
• Inventory
• Inventory Turnover
• Working Capital