The period (expressed in days) it takes for a business to convert its investments in inventory and other resources of the business into cash flows from sales is known as the cash conversion cycle (CCC). The CCC, also known as the Net Operating Cycle or just the Cash conversion Cycle, aims to quantify the length of time that each net input rupees spends in the production and sales cycle before it is turned into received cash.
This metric accounts for time required by the business to sell its inventory, the length of time needed to collect receivables, and the amount of time required to pay its debts. The CCC is one of several quantitative metrics that are used to assess how effectively a company’s operations and management are conducted. Rising CCC numbers should prompt more research and analysis based on other criteria, whereas declining or stable CCC values over several periods are a healthy sign. We must remember that CCC only applies to specific industries that depend on inventory management and related activities.
The mathematical formula for CCC is stated as: Because calculating CCC entails determining the net aggregate time spent over the three stages of the cash conversion lifecycle.
CCC = DIO + DSO – DPO, where
DIO = Days of Outstanding Inventory (also known as days sales of inventory)
Days Sales Outstanding, or DSO
Days Payable Outstanding (DPO)