Cash Conversion Cycle Formula

Cash Conversion Cycle Formula (Table of Contents)

Cash Conversion Cycle Formula
Examples of Cash Conversion Cycle Formula (With Excel Template)
Cash Conversion Cycle Formula Calculator

Cash conversion cycle term we used primarily in accounts and finance. Cash conversion itself has meaning in term only. Cash conversion cycle means how many days or month company take to convert its inventory into cash.

Formula for Cash Conversion Cycle(CCC)

Cash Conversion Cycle = DIO + DSO – DPO

Where

DIO: Stands for day’s inventory outstanding
DSO: Stands for days sales outstanding
DPO: Stands for day’s payable outstanding.

Examples of Cash Conversion Cycle Formula (With Excel Template)

Let’s take an example to understand the calculation of Cash Conversion Cycle in a better manner.

Cash Conversion Cycle Formula – Example #1

A company reported RS 2000 as beginning inventory and 5000 as inventory for the financial year ended 2017 with the cost of goods sold 50000. And at the beginning of the year receivable 5000 and at the end of financial year receivable was 6000, credit sales are 120000. And account payable at the starting was 2000 and at the yearend, it is 4000.

So first we have to calculate DIO.

DIO is calculated using the formula given below

DIO = (Average Inventory / Cost of Goods Sold) * No of Days

DIO = (((2000 + 5000)/2) / 50000) * 365
DIO = 25.55

Second, we have to calculate DSO

DSO is calculated using the formula given below

DSO = (Average Account Receivable / Total Credit Sales) * No of Days

DSO = (((5000+6000)/2) / 120000) * 365
DSO = 16.73

Third, we have to calculate DPO

DPO is calculated using the formula given below

DPO = (Average Account Payable / Cost of Goods Sold) * No of Days

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DPO = (((2000+4000)/2) / 50000) * 365
DPO = 21.9

Cash Conversion Cycle is calculated using the formula given below

Cash Conversion Cycle = DIO + DSO – DPO

Cash Conversion Cycle = 25.55 + 16.73 – 21.9
Cash Conversion Cycle = 20.38

Cash Conversion Cycle Formula – Example #2

Amazon has below detail, we will calculate the cash conversion cycle

Cash Conversion Cycle is calculated using the formula given below

Cash Conversion Cycle = DIO + DSO – DPO

Cash Conversion Cycle = 22.81 + 21.29 – 18.25
Cash Conversion Cycle = 25.85

Cash Conversion Cycle Formula – Example #3

Company ABC has the following information available regarding their expenses and income. We have to calculate the cash conversion cycle from below available information.

DIO is calculated using the formula given below

DIO = (Average Inventory / Cost of Goods Sold) * No of Days

DIO = (10000 / 50000) * 365
DIO = 73

DSO is calculated using the formula given below

DSO = (Average Account Receivable / Total Credit Sales) * No of Days

DSO = (8000 / 50000) * 365
DSO = 58.4

DPO is calculated using the formula given below

DPO = (Average Account Payable / Cost of Goods Sold) * No of Days

DPO = (11000 / 50000) * 365
DPO = 80.3

Cash Conversion Cycle is calculated using the formula given below

Cash Conversion Cycle = DIO + DSO – DPO

Cash Conversion Cycle = 73 + 58.4 -80.3
Cash Conversion Cycle = 51.1

You can download this Cash Conversion Cycle Formula Excel Template here – Cash Conversion Cycle Formula Excel Template

Explanation

Cash conversion cycle basically associated with the inventory of the company. Cash conversion cycle help management to take proper decision using available resources. Cash conversion cycle help in various ways for creating a wealth of company in the long run. Every company wants steady cash conversion for better performance of the company and continuous growth over a period and creates wealth for their existing and new shareholder.

CCC involves the calculation of time required for converting inventory and raw material into the final product or output. CCC calculation includes DIO which mean days inventory outstanding with the company and it’s associated with the cost of goods sold and average inventory during the year. And secondly, the cash conversion cycle also includes DSO which indicates how many days the other company takes for making payment for a credit sale. Last but not the least DPO which indicate days payable outstanding.

Cash Conversion Cycle= DIO+DSO-DPO

DIO and DSO are associated with company cash inflow and outflow of a company. Hence, only DPO is the only negative figure in the cash conversion cycle formula. On the other hand in cash conversion cycle formula there is only one figure is negative and it’s associated with the payable of the company.

A company’s cash conversion cycle broadly taken into account different terms and figure from the financial statement of a company. Which mainly include accounts payable accounts receivable, cost of goods sold and opening and closing inventory.

Revenue and cost of goods sold from an income statement
Inventory at the beginning and end of the time period from a trading account.
Account receivable at the beginning of the period and end of the time period from the balance sheet on the asset side
Account payable at the beginning and at the end of the period from the liability side from the balance sheet.
The number of days in the period

The first thing on the available inventory level and represent how much time it will take for the business to sell its inventory to final customer . This amount is calculated by using the days inventory outstanding (DIO). A less value of DIO is preferred as it indicates that the company is making sales in a higher amount, higher the DIO it indicates lesser the turnover so DIO should be less.

Days sales outstanding is calculated based on the cost of goods sold (COGS), which represent the cost of goods or acquiring or manufacture the product that the company sales during the year. Second stage focuses on the current sales and represents the duration of the time. It also taken into account the amount of the inventory and goods it purchased and represent the time horizon when company is required to payoffs those credits.

Relevance and Uses of Cash Conversion Cycle Formula

Cash conversion cycle that attempt to measure the time it takes a company to convert its inventory and other resources inputs into cash. Cash conversion cycle used to know the liquidity issues as well as excess inventory on hand. This can be an indicator of proof sales or even worse, a product that nobody wants.

Uses of cash conversion formula explain below.

The cash conversion cycle is a metric that expresses the length of time in days that it take for the company to convert its investment in inventory and others.
It is used for evaluating the company performance and management decision making ability and uses of resources properly.
Cash conversion cycle helps the company to know their inventory turnover over a period of time.
It also helps in to improve the efficiency within the company operation.
It helps to compare the performance of two different companies.