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The Cash Conversion Cycle (CCC) is a financial metric that measures how long it takes for a company to convert its investments in inventory and other resources into cash from sales. The CCC assesses the time it takes for a company to buy inventory, sell it, and collect cash from customers. The cycle consists of three components: Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payables Outstanding (DPO). A shorter CCC indicates better liquidity and operational efficiency, as the company can quickly turn resources into cash.
A retail company has a CCC of 45 days, meaning it takes 45 days to convert its inventory and sales into cash, after accounting for its payables period.
• CCC measures the time it takes to convert investments in inventory into cash.
• A shorter CCC indicates faster cash conversion and better operational efficiency.
• The cycle includes inventory turnover, sales collection, and payment of liabilities.
CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payables Outstanding (DPO).
A shorter CCC means the company can quickly turn inventory into cash, improving liquidity and reducing the need for external financing.
A negative CCC indicates that a company receives cash from sales before it needs to pay its suppliers, a sign of strong cash flow management.
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