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What is the cash conversion cycle? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about the cash conversion cycle. Furthermore, you will have access to an excel template with an example calculation that you can use you calculate the cash conversion cycle for any company.
What is the Cash Conversion Cycle? Why Is it important?
The cash conversion cycle (CCC) calculates how much time passes between the time the company uses cash to pay suppliers, and the time it receives cash from its customers.
The cash conversion cycle is an important quantitative measure of the efficiency of a company’s operations. It is better to see a lower cash conversion cycle because it means the company is collecting cash quickly from its customers and, at the same time, has more flexibility in paying its suppliers.
It’s important to remember that the cash conversion cycle can’t be applied to every sector, especially those that have no need for inventory. For example, whereas large retailers like Walmart focus on managing and selling inventory, insurance companies are not dependent on any kind of inventory to generate profit.
You may be wondering: but what is a good cash conversion cycle? A good CCC is one that is in line with the sector average. A too low cash conversion cycle may indicate that the company has some difficulties in paying its suppliers, while a too high CCC may indicate that the company can't collect cash from its customers in a reasonable time.
You can check that your stocks cash conversion cycle is ok by comparing it with the other companies in the sector using the Finbox data explorer. Just follow these simple steps:
Sign Up for free at Finbox
Go to the Finbox data explorer
Select the company and the metric you want to check (In this case we want to check the cash conversion cycle)
Scroll down to Sector Benchmark Analysis
Control in what decile are your stocks ( As you can guess, Apple is efficiently managing its business by collecting cash quickly from its customers while having a lot of flexibility in paying suppliers.)
How to calculate the cash conversion cycle with the right formula
CCC = DIO+DSO-DPO
DIO = Average Inventory / (Cost of Sales / 365)
DSO = Average Accounts Recievable / (Sales / 365)
DPO = Average Accounts Payable / (Cost of Sales / 365)
The cash conversion cycle is calculated by subtracting days payable outstanding from the sum of days of inventory outstanding and days sales outstanding. Days inventory outstanding (DIO) is calculated by dividing the average inventory by the daily cost of sales (cost of sales / 365). Days sales outstanding (DSO) is calculated by dividing the average accounts receivable by daily sales (sales / 365). Days payable outstanding (DPO) is calculated by dividing the average accounts payable by the daily cost of sales (cost of sales / 365).
Cash Conversion Cycle: Benchmarks by Sector
As of May 14, 2020, the sectors with the highest cash conversion cycles are healthcare, materials, and industrials. Energy, real estate, and telecommunication services are the sectors with the lowest cash conversion cycles.
You can get up to date stats and graphs like this directly in Excel with the Finbox Excel Add-in
Cash Conversion Cycle: Example [+Excel Template]
I’ve created an example calculation of the cash conversion cycle to try out. You can use it to calculate the cash conversion cycle for any company. Click here to open the spreadsheet in Google Sheets.