Financial modelling terms explained

# Cash Conversion Cycle

The cash conversion cycle is the number of days it takes from the time a company receives the money from it's customers to the time it pays its short term obligations and expenses.This is the formula for calculating the cash conversion cycle:

## What is Cash Conversion Cycle?

The cash conversion cycle (CCC) is a metric used to measure a company’s liquidity and efficiency in converting its net sales into cash. The CCC is calculated by adding the days of sales outstanding (DSO) to the days of inventory outstanding (DIO) and subtracting the days of payables outstanding (DPO).

A shorter CCC is generally better as it indicates that the company is generating cash more quickly. The CCC can be used to compare a company’s performance to its peers or to its own historical performance. It can also be used to identify potential areas for improvement, such as reducing the DSO or DIO.

## How Do You Calculate Cash Conversion Cycle?

The cash conversion cycle (CCC) is a measure of a company's efficiency in converting its net operating cash flow into cash and equivalents. The CCC is calculated by subtracting the company's average accounts receivable from its average accounts payable. This calculation gives you the number of days the company takes to convert its net operating cash flow into cash and equivalents.

To calculate the CCC, you first need to calculate the company's net operating cash flow. This is done by subtracting the company's operating expenses from its operating income. You then need to calculate the company's average accounts receivable and average accounts payable. To do this, you need to take the company's total accounts receivable and divide it by the number of days in the period. You then need to do the same thing with the company's total accounts payable.

Once you have the company's average accounts receivable and average accounts payable, you can subtract the average accounts receivable from the average accounts payable to get the company's cash conversion cycle.

## What is Cash Conversion Cycle Turnover?

The cash conversion cycle turnover (CCC) is a measure of how efficiently a company is converting its inventory into cash. It is calculated by dividing the company's annual sales by the average of its accounts receivable and inventory. This ratio measures how quickly a company can turn its assets into cash.

## What are the Advantages of Using Cash Conversion Cycle?

Cash conversion cycle (CCC) is a metric that measures the time it takes a company to convert its net operating revenues into cash. It is calculated by adding the days of inventory on hand (DIO), the days of sales outstanding (DSO), and the days of payables outstanding (DPO). The shorter the CCC, the faster the company can turn its revenue into cash.

There are several advantages of using CCC:

1) It can help you assess a company's liquidity and financial health. The shorter the CCC, the more liquid the company is.

2) It can help you identify potential problems with a company's cash flow. If the CCC is getting longer, it may be a sign that the company is having trouble collecting payments from its customers or paying its suppliers.

3) It can help you make better decisions about when to invest in a company. If the CCC is short, it may be a good time to invest because the company is likely to have more cash available to grow its business.

4) It can help you make better decisions about when to sell your investment in a company. If the CCC is getting longer, it may be a sign that the company is having trouble generating cash flow and you may want to sell your investment.

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