The cash conversion cycle (CCC) measures how many days pass between when a business pays its suppliers and when it collects cash from customers. It answers: how long is my cash tied up in operations?
CCC = Days inventory outstanding + Days sales outstanding − Days payable outstanding
- Days inventory outstanding (DIO): How long inventory sits before being sold. A restaurant using ingredients within 3–5 days has low DIO. A retailer holding merchandise for 45 days has high DIO.
- Days sales outstanding (DSO): How long accounts receivable takes to collect. A cash-and-carry restaurant has DSO near zero. A catering company with Net 30 invoices has DSO around 30–40 days.
- Days payable outstanding (DPO): How long the business takes to pay its accounts payable. If suppliers offer Net 30 terms and the business pays on day 28, DPO is 28.
Example: A catering business buys ingredients (pays supplier in 15 days), holds inventory for 3 days, delivers the catering order, and collects from the client in 35 days.
CCC = 3 (DIO) + 35 (DSO) − 15 (DPO) = 23 days
For 23 days, the business has paid for ingredients but hasn’t collected from the client. That gap must be funded from working capital or a line of credit.
A shorter CCC means less cash tied up in operations. Strategies to shorten it: require deposits (reduce DSO), negotiate longer payment terms with suppliers (increase DPO), and minimize inventory on hand (reduce DIO). See Managing Cash Flow.