Cash Conversion Cycle Calculator
Effective Cash Flow Management: Measure your company’s financial health
NOTE: to calculate Your Cash Conversion Cycle you must first calculate your DSO, DPO and DSI values above.
The following are some indicators of your company’s financial health:
Days Sales Outstanding (DSO)
Also called the average collection period. How long does it take to collect a customer’s invoice? Accounts Receivable is among the largest assets on the Balance Sheet and converting it to cash efficiently. Check industry averages, but many companies try to keep DSO below 1.5 times payment terms; this is increasingly difficult in today’s business environment where large companies regard their vendors as a source of company financing. (the smaller the better)
Days in Accounts Payable (DPO)
The converse of DSO – How fast does a company pay its vendors? The time vendors allow a company to pay bills is “free” financing, a desirable alternative to bank financing. The challenge is to hold on to cash as long as possible without antagonizing vendors. Typically DPO targets are similar to DSO targets. (the longer the better)
Inventory Turnover/Days Sales in Inventory (DSI)
How long does it take to turn inventory into sales? This ratio is critical for any business that carries inventory, as inefficient production or slow-moving inventory ties up critical working capital. This ratio can be stated in # of turns per year or # of days in inventory. It is industry dependent and no general guideline is available. Some reference materials recommend using the cost of sales instead of net sales in the computation.
Cash Conversion Cycle – CCC
Usually, a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery.
This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales. The shorter the cycle, the less time capital is tied up in the business process, and thus the better for the company’s bottom line.
CCC expresses the length of time, in days, that it takes for a company to convert resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its bills without incurring penalties.
Your Cash Conversion Cycle is calculated from the values entered above. You must first calculate your DSO, DPO and DSI values.