The cash conversion cycle formula
CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO). Expressed differently: Stock Days + Debtor Days - Creditor Days. A lower number means cash is cycling through the business faster.
- DIO (stock days): average number of days stock is held before being sold
- DSO (debtor days): average number of days to collect payment after a sale
- DPO (creditor days): average number of days taken to pay suppliers
- CCC = DIO + DSO - DPO
What a high CCC means
A high CCC means your business has capital tied up in the operational cycle for longer. For example, a business with 30 days of stock, 60 days of debtors and only 20 days of creditor support has a CCC of 70 days. This means every pound of revenue requires approximately 70 days of financing before it is collected as cash.
For a growing business, a long CCC means every pound of additional revenue requires additional working capital to finance it. This is why fast-growing businesses often need external working capital facilities even when they are profitable.
How to shorten the cycle
- Reduce stock days: improve demand forecasting, reduce minimum order quantities, negotiate JIT delivery
- Reduce debtor days: tighten payment terms, improve credit control, use invoice finance
- Increase creditor days: negotiate longer supplier terms
Frequently Asked Questions
Can a CCC be negative?
Yes. Some businesses, particularly retailers like supermarkets, have negative CCCs. They sell goods and collect cash before they have to pay their suppliers. This is a very desirable position from a working capital perspective.
How does invoice finance affect the CCC?
Invoice finance does not change your reported debtor days, but it effectively removes the cash impact of those days. You receive cash as soon as invoices are raised rather than waiting for customers to pay.