If you own a business but don’t know what the cash conversion cycle (CCC) is, then you are missing out on opportunities to increase your cash flow and profitability. The good news is that in today’s post, we tell you everything you need to know about CCC.
What Is the Cash Conversion Cycle (CCC)?
The cash conversion cycle (CCC) refers to the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales.
CCC consists of three components: days inventory outstanding (DIO), days sales outstanding (DSO), and days payables outstanding (DPO).
- DIO: Measures how long it takes for a business to sell its inventory
- DSO: Measures how long it takes for a business to collect payment from its customers
- DPO: Measures how long it takes for a business to pay its suppliers
Businesses can calculate their CCC by subtracting DPO from DIO and DSO.
For example, if it takes a business 15 days on average to sell its inventory (DIO), 16 days to collect payments (DSO) and 18.5 days to pay suppliers (DPO), then its cash conversion cycle is 12.5 days (that is, 31-18.5).
Why Is CCC Important?
A business’s cash conversion cycle is important because it measures the time it takes for the company to turn its raw materials and inventory into cash.
By understanding your company’s CCC, you can discover inefficiencies in the cash conversion process.
For example, a business with a long CCC may need to reduce its DIO by selling inventory more quickly or negotiate longer payment terms with its suppliers to improve its DPO.
Improving Your Cash Conversion Cycle
One key to optimizing your CCC is to improve your inventory management. By reducing your Days Inventory Outstanding (DIO), you can shorten your CCC and generate cash more quickly.
This can be achieved by implementing measures such as just-in-time (JIT) inventory systems, which only purchase inventory when it’s needed.
Alternatively, you can optimize your DSO by improving your credit policies, offering discounts for early payment, or using accounts receivable factoring to turn your unpaid invoices into cash.
Also, by extending your DPO, you can keep your cash longer, which can ultimately improve your cash flow.
Wrapping It Up
The cash conversion cycle is a crucial metric for businesses that want to improve their cash flow and profitability.
By implementing changes such as optimizing your inventory management and credit policies or using factoring of accounts receivable, you can improve your business’s cash flow, freeing up more cash to invest in growth, pay down debt, or improve your bottom line.
In short, whether you’re a small business owner or a finance professional, optimizing your CCC is always a good idea!
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.