Cash Conversion Cycle (CCC)
This measures the length of time a company must finance its inventory purchases before receiving the cash from their sale. Said another way, It is also the length of time a company will have to come up with cash through financing or other methods to cover costs.
For every dollar put into a business for a product or service, the Cash Conversation Cycle is a measure of how long it takes to get that same dollar back out of the business.
This is a measure of “the Big Three” (Receivables, Payables and Inventory) reflected within the same time period. The Cash Conversation Cycle can be used to measure how long the firm will be deprived of cash if it increases its investment resources in order to support customer sales. It is thus a measure of liquidity risk.
It is worth noting that shortening the Cash Conversation Cycle creates its own risks: while a firm could achieve a negative Cash Conversation Cycle by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not always sustainable. This metric can only be measured if a company uses the Accrual Basis Accounting.
Formula: Receivable Days + Inventory Days – Payable days = CCC
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