Master Your Org’s Financial Health with the Cash Conversion Cycle

Written by Kalei White
September 5, 2023

The Cash Conversion Cycle measures a company’s efficiency in managing capital. Our platform simplifies CCC calculation, enabling better cash flow management.

Are you familiar with the Cash Conversion Cycle (CCC)? This key metric can be a game changer for your business operations, as it measures the efficiency of your capital management. Understanding and mastering your CCC will unlock a deeper insight into your business’s financial health and operational efficiency by determining how quickly you can convert resources into cash. 

Because at the end of the day, regardless of any other financial metric, a company lives and dies by its access to cash. No matter how profitable a business is on paper, if that doesn’t convert quickly into money in the bank, there are going to be serious problems to come.

Today, we’ll explore the intricate workings of the CCC, including how to calculate it and the strategies to optimize it with the help of Trovata’s financial data analytics tools.

The Basics of the Cash Conversion Cycle

At its core, the CCC represents how well your business is managing its working capital. It’s an assessment of the number of days it takes for your business to sell its inventory (Days Inventory Outstanding or DIO), collect from accounts receivable (Days Sales Outstanding or DSO), and pay its accounts payable (Days Payable Outstanding or DPO). 

Collectively, these three elements form the backbone of the CCC, a metric crucial to the financial health of your business.

The lower the number of days in your CCC, the quicker you’re turning resources into cash. This enhances your liquidity, allowing you to meet short-term liabilities and invest in growth opportunities. On the contrary, a lengthy CCC can suggest potential issues in your cash management, which might negatively affect your working capital management and, eventually, your business’s survival.

Shortening your company’s CCC is a fundamental part of forming a strong cash culture in your business, which can strengthen its resilience.

Understanding the Value of the Cash Conversion Cycle

The CCC isn’t just another financial metric; it’s a tool that can enhance profitability and guide your strategic business decisions. For retailers, understanding the CCC can aid in inventory management and the efficient use of working capital. Additionally, a good cash conversion cycle can shed light on the effectiveness of your collections process and your relationships with suppliers.

Your CCC can be found in your financial statements, derived from numbers on the balance sheet and the income statement, like the cost of goods sold (COGS), beginning inventory, credit sales, and other relevant details. And if your company’s cash conversion cycle shows a negative CCC, it implies operational efficiency as your business is able to pay suppliers even before the cash from sales comes in.

Want to dive deeper into how cash management can benefit your business?

Check out this insightful article, where we explore the differences between cash management and accounting and the importance of building a culture of cash management.

Why is Cash Flow So Important?

Regardless of the demand for your company’s products and services, the average order size or the quality of your offering, cashflow is the number one metric on which your business fails or succeeds. 

Without money coming into the company accounts, you can’t pay staff or suppliers and allocate money to marketing and new business generation. Cashflow literally is the oil that keeps the engine going in a business.

There are many cases in the corporate world where we’ve seen cash flow issues cause the failure of a business. It’s why it’s common to see a company file for bankruptcy, only to be bought out by a competitor or investor and continue trading. 

There is value in the brand, the inventory and the company as a whole, but cash flow issues mean the ongoing running of the business isn’t possible. In these takeovers, the purchaser is able to provide an injection of cash (adding oil to the engine) to provide time to work out the cash flow problems.

It’s also the entire basis of the startup world. Cash flow is provided by investors because without it, the business couldn’t operate.

Companies like Uber and Airbnb have operated for years without positive cash flow, with the gap covered by investors.

So, in short, cash flow is the most important gauge of the health of a company. Even those with massive amounts of debt can survive if the cash flow is strong enough. And when it comes to assessing cash flow, the CCC is a great way to do it.

Crunching Numbers: Cash Conversion Cycle Calculation

Breaking down the CCC calculation involves three key elements: DIO, DSO, and DPO. 

  • DIO measures the amount of time your cash is tied up in inventory before it’s sold and converted into cash. 
  • DSO signifies the average number of days it takes to collect cash after a sale. 
  • DPO measures the average time you take to pay your suppliers.

Now that we understand the variables, let’s calculate it.

The Cash Conversion Formula: DIO + DSO – DPO = CCC

Let’s look at a quick example. Let’s say we’re looking at a business called Jim’s Contractors. Jim is a pretty risk averse guy, so he likes to keep extra materials on hand at all times. In fact, his staff are often complaining about the lack of storage at the workshop.

Because of this, Jim’s often has materials lying around for a substantial amount of time before they’re used and billed to a customer. As a result, his DIO is around 180 days. Jim also hates to have outstanding bills, so he pays for these materials and his other suppliers and staff very quickly.

His DPO is just 7 days.

Lastly, Jim’s risk averse nature means he’s also a little timid when it comes to asking his customers for money. He doesn’t like chasing invoices and bothering his clients for payment. Despite 14 day payment terms, his DSO hovers around 40 days.

Unsurprisingly, Jim is having cashflow problems. Luckily, he’s agreed to hire someone to manage the books, and the first thing new hire Sarah does is calculate Jim’s CCC.

180 + 40 – 7 = 213.

The total cash conversion cycle for Jim’s Contractors is 213 days. Given that the average CCC is generally considered to be between 30 – 45 days, this is crazy. Sarah whips things into shape, bringing clients back in line with their 30 day payment terms, drastically overhauling the inventory purchase process, and only paying outstanding invoices when they’re due.

The DIO drops to 30 days, DSO to 28 days and DPO increases to 30 days.30 + 28 – 30 = 28.

Now, Jim’s Contractors has a very healthy CCC, allowing the business to grow from strength to strength.The cash conversion cycle formula will provide a snapshot of your company’s cash efficiency. Remember, a low CCC means you’re quickly turning inventory into cash, reflecting good operational efficiency and a strong cash management process.

For more guidance on how to effectively manage your cash position, check out our helpful guide. It covers key metrics, tools, and tips to streamline your cash flow management.

Simplifying Your Cash Conversion Cycle with Trovata

Getting together the information needed to calculate your CCC would be a pretty daunting task if done manually. But with Trovata, it becomes a walk in the park. 

Our robust financial data analytics tools streamline the process, integrating with your existing financial systems to track and analyze your DIO, DSO, and DPO automatically. Because these metrics are always available at your fingertips, it means your finance team can spend less money on crunching numbers and data entry, and more time on the high-value tasks of data analysis.

Rather than spending three days getting the figures together to then start to assess the current state of your CCC, those three days can be spent identifying solutions to any shortfalls in your financial results.

As any good treasurer or CFO knows, time is money, and the ability to re-allocate your team from low-value to high-value tasks can seriously add to your bottom line in the long run.

Not only that, but the ability to allow you to operate your finance team more efficiently potentially means a lower headcount, and lower staff costs as a result.

It’s possible to optimize your CCC by selling inventory faster, promptly collecting accounts receivable, and tactfully extending payment terms for accounts payable. Proper analysis is the only way to understand which areas have the most room for improvement.

Why wait to take control of your cash flow? Start managing your CCC with the click of a button with Trovata. See firsthand how simple it can be to handle your cash flow with Trovata and start your journey toward improved financial health. 

Optimize Your Cash Flow with Trovata

Navigating the world of business finance can be complex, especially when it involves metrics like the CCC. 

But, understanding these metrics is key to assessing your financial health and making informed business decisions. With Trovata, you can easily understand and manage your cash conversion cycle, helping your business not just to survive but to thrive.

Remember, knowledge is power, and applying this knowledge can lead to the magic of financial success. Take your first step towards becoming a cash conversion cycle guru today, and experience the difference that Trovata can make in your journey toward financial mastery.

Are you ready to take control of your cash flow? Why wait?

Experience firsthand how easy managing cash can be with Trovata and book a demo today. After all, your journey towards better financial health starts with understanding your CCC. So, explore for yourself and unlock the potential of efficient cash flow management.

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