Operating cash flow breaks down simply: profit plus depreciation, adjusted for working capital swings. The Cash Conversion Cycle (CCC) isolates that working capital piece—arguably finance's trickiest concept.
1) What is it (CCC)?
CCC measures how many days it takes a dollar to travel through your business from start to finish. Picture yourself as a retailer ordering 1,000 units: how long until they're sold, shipped, and cash collected? That's your CCC.
Three working capital metrics combine here:
Days Sales Outstanding — time to collect sales
Days Inventory on Hand — time to store and sell inventory
Days Payable Outstanding — time to pay bills
2) How to calculate it?
Start with these formulas:
Working capital = A/R + Inventory - A/P
Cash Conversion Cycle = DSO + DIH - DPO
You're measuring: 1) average days holding inventory before sale; plus 2) average days collecting from customers; minus 3) average days before paying suppliers.
Working capital is dollars on your balance sheet. CCC is days—how long those dollars take returning as collected sales.
3) Why is this so important?
Your CCC is "one number to rule them all" for measuring cash flows from working capital.
It's measured in days, making it intuitive for owners and employees. Those days translate directly to dollars, showing actual cash impact.
Different business models carry different cycles. Retailers hold lots of inventory and run higher CCCs than restaurants, which carry no inventory and collect via credit card.
Usually, CCC limits two things: 1) converting profits into cash flow; and 2) growing your business. Both sit high on most owners' priority lists.
4) How to use it?
Plug your financial data into a simple calculator to track CCC trends:
Look at trends to spot working capital problems and identify which bucket leaks—A/R, inventory, or A/P. Then take corrective steps.
Want more cash? Bring this number down. Some rare models run negative cycles, getting paid before paying suppliers or buying inventory.
Here's my approach:
Find benchmark cash cycles in your industry. Aim to operate better than average. If peers run 90 days and you're at 110, something's off—maybe weak supplier terms or excess inventory.
Monitor your CCC over time and keep it within guardrails. Say peers average 90 days and you want 80. Give yourself wiggle room and stay within 80–90 days.
Example:
Review this company's 10-year cash conversion chart. How does recent performance look (since 2022)? Though trends improved since then, does more improvement exist?
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Colin King, CPA, CFA
CEO, Profit Mastery
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