What is Cash Conversion Cycle?
The number of days between when you pay for inventory and when you collect cash from customers. A key measure of working capital efficiency.
Key Takeaways
- •CCC = Days Inventory + Days Receivables - Days Payables
- •Measures how long cash is tied up in business operations
- •Lower CCC means less working capital required; negative CCC generates cash
- •Improve by collecting faster, turning inventory quicker, or extending payment terms
Cash Conversion Cycle Definition
The Cash Conversion Cycle (CCC) measures the time (in days) it takes for a company to convert its investments in inventory and other resources into cash from sales. It answers: "How long is my cash tied up before I get it back?"
The Cash Conversion Cycle Formula
DIO = Days Inventory Outstanding (how long inventory sits)
DSO = Days Sales Outstanding (how long to collect receivables)
DPO = Days Payables Outstanding (how long to pay suppliers)
CCC Components Explained
Days Inventory Outstanding (DIO)
How many days, on average, inventory sits before being sold.
Example: $500K inventory / $3M COGS = 61 days
Days Sales Outstanding (DSO)
How many days, on average, to collect payment from customers.
Example: $400K AR / $5M revenue = 29 days
Days Payables Outstanding (DPO)
How many days, on average, you take to pay suppliers.
Example: $250K AP / $3M COGS = 30 days
Example CCC Calculation
Manufacturing Company Example
| Days Inventory Outstanding (DIO) | 61 days |
| Days Sales Outstanding (DSO) | + 29 days |
| Days Payables Outstanding (DPO) | - 30 days |
| Cash Conversion Cycle | 60 days |
This company's cash is tied up for 60 days on average—from paying for raw materials to collecting from customers.
CCC by Industry
| Industry | Typical CCC | Notes |
|---|---|---|
| Grocery Retail | 5-15 days | Cash sales, fast inventory turn |
| E-commerce | -30 to +30 | Dropship = negative; inventory = positive |
| SaaS (Annual) | -30 to -90 | Collect upfront, no inventory |
| Manufacturing | 45-90 days | Significant inventory and AR |
| Construction | 60-120 days | Long project cycles, slow payment |
| Distribution | 30-60 days | Inventory carrying costs |
How to Improve Your Cash Conversion Cycle
Reduce DSO
Invoice immediately, offer early payment discounts, automate collections, require deposits on large orders.
Reduce DIO
Improve forecasting, implement JIT inventory, drop slow-moving SKUs, negotiate vendor consignment.
Increase DPO
Negotiate longer payment terms, use credit cards strategically, but always pay on time.
Change Business Model
Subscription models with upfront payment, milestone billing, or progress payments dramatically improve CCC.
Working Capital Impact
Reducing CCC by 10 days on $10M revenue frees up approximately $274,000 in working capital. That's real cash you can use for growth, debt reduction, or distributions—without borrowing.
Frequently Asked Questions
What's a good cash conversion cycle?
It varies by industry. Retailers might have 30-45 days; manufacturers 60-90 days. SaaS companies with annual prepayments can have negative CCC. Compare to your industry peers. Lower is generally better—it means less capital tied up in operations. Aim for improvement over your own historical numbers.
Can CCC be negative?
Yes, and it's a good thing. A negative CCC means you collect from customers before paying suppliers—your business generates cash as it grows. Amazon famously has negative CCC (around -30 days). Subscription businesses with annual prepayment often achieve this.
How does CCC affect cash flow?
Longer CCC means more cash tied up in working capital. If your CCC is 60 days and you do $10M in annual revenue, roughly $1.6M is locked in working capital. Reduce CCC by 15 days, and you free up $400K for other uses without borrowing.
How do I improve CCC without hurting relationships?
For receivables: offer early payment discounts, automate invoicing, require deposits upfront. For inventory: improve demand forecasting, reduce SKUs, negotiate vendor consignment. For payables: ask for extended terms in exchange for volume commitments, but always pay on time to maintain relationships.
Related Terms & Resources
Working Capital
The broader context of CCC
13-Week Cash Flow Template
Forecast your cash needs
Burn Rate
Related cash metric
Fractional CFO Guide
Get help optimizing cash
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