Cash Conversion Cycle (CCC): formula and interpretation
The cash conversion cycle (CCC) is the average number of days cash stays tied up in operations, from paying for materials or goods to collecting the sales proceeds. It is usually the first metric to check when a company reports an operating profit but its bank balance keeps shrinking.
Formula
CCC = DSO + DIO − DPO
- DSO (days sales outstanding) = receivables ÷ revenue × 365
- DIO (days inventory outstanding) = inventory ÷ cost of sales × 365
- DPO (days payables outstanding) = payables ÷ cost of sales × 365
DSO is how long customers take to pay, DIO is how long goods sit in stock, and DPO is how long you take to pay suppliers. The first two tie cash up; the third holds it back.
Caveat's convention: it uses period-end balances rather than averages and a 365-day year. Payables are divided by cost of sales as an approximation of purchases.
Worked example
Take a company with revenue of KRW 10 hundred million (KRW 1.0 billion), cost of sales of 6, year-end receivables of 1.5, inventory of 1.2 and payables of 0.6 (all in hundred-million KRW). The figures below come from Caveat's calculation engine.
| Metric | Days |
|---|---|
| DSO | 54.8 |
| DIO | 73 |
| DPO | 36.5 |
| CCC | 91.3 |
In other words, the business needs working capital for roughly 91 days between buying and getting paid.
How to read it
A single number does not settle whether things are good or bad. Look at three things together.
- Industry: manufacturers and distributors that hold stock run long cycles; subscription and platform models that collect first run short or negative ones. Compare against the same industry.
- Trend: the change between the prior and current year is often more informative than the absolute level.
- Composition: if the CCC lengthened, check whether DSO, DIO or DPO moved.
Both sides: a longer CCC is not always a bad sign — building stock ahead of growth or offering generous terms to new customers can stretch it temporarily. Conversely, a shorter CCC that comes from paying suppliers later carries its own cost in supplier relationships and credit risk.
The cost of tied-up cash
The working capital operations tie up is receivables + inventory − payables, which is KRW 2.1 hundred million in the example. If that money had earned a 4% deposit rate, the opportunity cost would be roughly KRW 840 ten-thousand a year. Caveat reports state this 4% as an explicit assumption and show it against SG&A expenses.
What to check alongside
- The gap between operating cash flow and net income: is profit turning into cash?
- Current and quick ratios: is there enough liquidity to carry the tied-up cash?
- Growth of receivables and inventory against growth of revenue.
Limitations
- Year-end balances can distort the result for seasonal businesses depending on the closing date.
- Dividing payables by cost of sales is an approximation and can differ from a calculation based on actual purchases.
- Working from financial statements alone hides differences in payment terms between customers.
- This is reference analysis and does not replace credit, investment or tax decisions.
FAQ
- Is a shorter cash conversion cycle always better?
- A shorter cycle generally means less working capital is needed. The right level depends on the industry and strategy, and if the cycle shortened because suppliers are being paid later, that carries other risks, so look at the components and the trend too.
- Can the cash conversion cycle be negative?
- Yes. In subscription, platform or retail models that collect cash first and pay suppliers later, a high DPO and customer prepayments can push it below zero.
- Which financial statement items are needed?
- Five: revenue, cost of sales, trade receivables, inventory and trade payables, taken from the balance sheet and income statement.
- How is it calculated for a service company without inventory?
- With no inventory, DIO is taken as zero and the cycle is simply DSO − DPO.