Cash Conversion Cycle

The CCC is critical because it:

• Optimizes Cash Flow: Shorter cycles mean faster cash recovery, improving liquidity and operational flexibility.
• Enhances Operational Efficiency: Highlights areas in the supply chain or sales process where efficiency can be improved.
• Supports Financial Planning: Helps businesses plan for expenses, investments, and growth without running out of cash.
• Reduces Financing Needs: Efficient cash conversion reduces the need for external funding.
• Improves Profitability: Efficient management of resources lowers costs and increases overall profitability.

For startups, a well-managed CCC ensures sufficient cash availability to support daily operations and growth initiatives.

The CCC is calculated using the formula:

CCC = DIO + DSO – DPO

• DIO (Days Inventory Outstanding): The average number of days inventory is held before being sold.
• DSO (Days Sales Outstanding): The average number of days it takes to collect payment from customers after a sale.
• DPO (Days Payable Outstanding): The average number of days the company takes to pay its suppliers.

Example:
If a company has a DIO of 30 days, a DSO of 40 days, and a DPO of 20 days:
CCC = 30 + 40 – 20 = 50 days
This means it takes 50 days to convert invested cash into revenue.

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