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# What Does Cash Conversion Cycle (CCC) Say About a Company's Management?

The cash conversion cycle (CCC) is a formula in management accounting that measures how efficiently a company's managers are managing its working capital. The CCC measures the length of time between a company's purchase of inventory and the receipts of cash from its accounts receivable. It's used by management to see how long a company's cash remains tied up in its operations.

### Key Takeaways

• The cash conversion cycle (CCC) helps management determine how long a company's cash remains tied up in operations.
• CCC is calculated as days inventory outstanding plus days sales outstanding min days payable outstanding.
• A longer CCC means it takes a longer time to generate cash, which can mean insolvency for small companies.
• A shorter CCC means the company is healthier as it can use additional money can then be used to make additional purchases or pay down outstanding debt.

## Cash Conversion Cycle (CCC) Formula

The formula for calculating the cash conversion cycle is:

\begin{aligned} &\text{CCC} = \text{DIO} + \text{DSO} - \text{DPO} \\ &\textbf{where:} \\ &\text{CCC} = \text{Cash conversion cycle} \\ &\text{DIO} = \text{Days inventory outstanding, the average number} \\ &\text{of days the company holds its inventory before selling it} \\ &\text{DSO} = \text{Days sales outstanding, the number of days of} \\ &\text{average sales the company currently has outstanding} \\ &\text{DPO} = \text{Days payable outstanding, the ratio indicating} \\ &\text{an average number of days the company takes to pay}\\ &\text{its bills} \\ \end{aligned}

## Why the Cash Conversion Cycle (CCC) Matters to Management

When a company—or its management—takes an extended period of time to collect outstanding accounts receivable, has too much inventory on hand, or pays its expenses too quickly, it lengthens the CCC.

A longer CCC means it takes a longer time to generate cash, which can mean insolvency for small companies.

When a company collects outstanding payments quickly, correctly forecasts inventory needs, or pays its bills slowly, it shortens the CCC. A shorter CCC means the company is healthier. Additional money can then be used to make additional purchases or pay down outstanding debt.

When a manager has to pay its suppliers quickly, it's known as a pull on liquidity, which is bad for the company. When a manager cannot collect payments quickly enough, it's known as a drag on liquidity, which is also bad for the company.

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