A topic we regularly discuss on our blog is the different KPIs that we can use to measure the effectiveness of operations and inventory management. This relationship between financial performance and operations gives us an idea of a company’s level of efficiency.

In this article, we will take a closer look at the CCC (Cash Conversion Cycle). It’s a relatively complex KPI because to calculate it, we first need to calculate 3 other KPIs (DIO, DSO and DPO). Let’s take a look at all of them below.

What is the Cash Conversion Cycle (CCC) and what is it for?

The Cash Conversion Cyle is a metric that measures the time it takes from when a company makes a payment to purchase inventory until it receives disbursement from the customer for the sale of that inventory.

In other words, it represents the period during which a company’s capital is committed in the operating cycle. It comprises three main stages: the inventory period, during which the company acquires and stores inventory; the accounts receivable period, in which inventory is sold to customers on credit; and the accounts payable period, which represents the time the company has to pay its suppliers.

For practical purposes, the CCC – or rather its interpretation and consequent decision-making – can help us in the following aspects of running a business:

Liquidity management

It helps to assess how efficiently a company manages its operating cash flow. A shorter CCC means that the company recovers its investment more quickly, improving its liquidity.

Optimisation of working capital

It allows the company to identify inefficiencies in the management of inventory, accounts receivable, and accounts payable. By understanding these components, the company can take steps to reduce the amount of time that capital is committed in the operating cycle.

Performance evaluation

It provides a metric to compare the company’s operating performance over time and against its competitors. A lower CCC generally indicates better operating efficiency.

Financial planning

It assists in strategic planning and decision-making. Companies can use the CCC to adjust their financing strategies and improve inventory and credit management practices.

Identification of operational problems

It can reveal underlying problems in the supply chain, production, inventory management, or accounts receivable. In turn, this allows the company to take action to correct the situation if necessary.

What is the Cash Conversion Cycle (CCC) formula?

As mentioned, the complexity of the Cash Conversion Cycle lies in the fact that, in order to calculate it, we must first determine the value of other KPIs. So, to calculate the CCC, we must first know the DIO (Days of Inventory Outstanding), the DSO (Days Sales Outstanding) and the DPO (Days Payable Outstanding). In a nutshell, this is what these 3 KPIs measure:

  • DIO: Measures the number of days it takes a company to sell its average inventory during a given period.
  • DSO: Measures the average number of days it takes for a company to collect money from its sales.
  • DPO: Measures the average number of days a company takes to pay its suppliers for purchases made.

Once these values have been determined, the formula used to determine the CCC is as follows:


How to calculate the CCC: a practical example

Now we know the formula, let’s go through a practical example. Let’s think about a lamp manufacturer that wants to measure the CCC of four of its references. Well, the first thing it should do is to find out the 3 KPIs we have seen before: the DIO, the DSO, and the DPO.

Reference DIO (days/year) DSO (days/year) DPO (days/year)
Lamp A 45 30 20
Lamp B 50 35 25
Lamp C 40 25 30
Lamp D 60 40 35

Once this data has been collected, we are in a position to calculate the CCC.

1. Lamp A

CCC 𝐴=45+30-20=55 days

2. Lamp B

CCC 𝐵=50+35-25=60 days

3. Lamp C

CCC𝐶=40+25-30=35 days

4. Lamp D

CCC𝐷=60+40-35=65 days


Reference CCC (Days)
Lamp A 55
Lamp B 60
Lamp C 35
Lamp D 65


How should the Cash Conversion Cycle (CCC) be interpreted?

We can mainly draw conclusions from the CCC based on whether the value we obtain is high or low. However, what is considered a high CCC or a low CCC will depend on the sector in which the company operates, the nature of its own business, the macroeconomic context, etc.

That said, here are some of the main generic interpretations that we can make of this KPI:

CCC under

  • Operational efficiency: A lower CCC indicates that the company is converting its inventory into cash more quickly. This suggests efficient management of inventory, accounts receivable, and accounts payable.
  • Improved liquidity: The company has better cash flow, which reduces the need for external financing and improves liquidity.
  • Reduced risk: By having capital ‘locked up’ in inventory for less time, the company faces less risk associated with fluctuating demand, collection problems, or stock obsolescence.

High CCC

  • Operational inefficiency: A higher CCC indicates that the company takes longer to convert its inventory into cash, which may point to inefficiencies in inventory management, accounts receivable, or accounts payable.
  • Increased need for capital: The company needs more external or internal financing to maintain its operations, which may increase financing costs.
  • Increased risks: Having capital tied up for longer can increase financial risk, especially if there are problems with inventory turnover or accounts receivable. Similarly, the longer it takes to dispose of inventory, the greater the risk of inventory depreciation.

In our previous example, that of the lamp manufacturer, the interpretation we could make of the CCC is as follows:

  • Lamp C (CCC = 35 days): It is the most efficient, with capital tied up for the shortest time. The company should investigate the inventory and credit management practices of this benchmark to replicate it for its other products.
  • Lamp D (CCC = 65 days): Has the highest CCC, indicating possible problems in inventory management, credit sales, or payments to suppliers. A detailed review of these areas is recommended to improve efficiency.

At what levels is it advisable to calculate the Cash Conversion Cycle?

The level at which we decide to calculate the CCC will depend on the specific needs of the company, as well as the level of detail we want. Depending on a person’s role in the company, the level of detail that is required will be different.

CCC at SKU level

  • Interested parties: Category managers, Inventory managers.
  • Utility: This level of detail allows category and inventory managers to identify which specific products are affecting the cash cycle the most. It helps to make accurate decisions on purchasing, promotions, and stock management.

Category level

  • Interested parties: Category managers, Product managers.
  • Utility: Analysing the CCC at category level is useful for category managers who need to optimise turnover and inventory management within their specific area. It facilitates comparison between different categories and the identification of areas for improvement.

Total company level

  • Stakeholders: COO, CFO
  • Usefulness: At this level, the CCC provides an overview of the operational efficiency and financial health of the company. It is useful for senior executives in making strategic decisions, such as financial planning, working capital management, and assessing the overall efficiency of the supply chain.

Differences by sector

As mentioned above, although it is not the only influential variable, the sector of activity largely determines what is considered a high or low Cash Conversion Cycle. Let’s look at some examples.

Food sector

The cash conversion cycle is generally very low, especially for perishable products. Companies need to quickly convert inventory into sales to avoid losses and avoidable waste.

FMCG retail sector

Generally low, as inventory turnover is fast and the customer pays as soon as the product is purchased. However, payment terms to suppliers can be extended to optimise cash flow, which can help to maintain a low CCC.

Manufacturing sector

Moderate to high, as production processes can be lengthy and the time to convert inventory into sales is longer. In addition, they may offer longer credit terms to their customers. Obviously, there can be large variations depending on the products being manufactured.

Technology sector

Variable, depending on the product. Products with high turnover and rapid obsolescence should have a lower CCC.

Pharmaceutical sector

Pre-launch is high due to long development and regulatory approval periods. However, once on the market and with regular demand, lead times can decrease and stabilise, as can the CCC.

Consumer electronics

High, as products have long life cycles and demand is less frequent. Production and distribution can also be longer.

Cash Conversion Cycle: How long it takes you to liquidate your stock determines how efficient you are

The Cash Conversion Cycle (CCC) is an important metric for measuring and adjusting the financial efficiency of a company. It provides a clear picture of how long it takes a company to convert its inventory investments into cash flows. Therefore, an optimised CCC can improve liquidity and ‘free up’ cash that would otherwise be tied up in stock and at risk of being devalued.

Understanding CCC allows for the identification of inefficiencies in inventory management and in supplier and customer relationships, enabling companies to make more informed strategic decisions.

But it is also important to bear in mind that the assessment of the CCC should be contextualised according to the specificities of the sector and the nature of the company – a fast fashion company is not the same as a luxury clothing retailer, even if both operate in the fashion sector – in order to set realistic targets.

Cash Conversion Cycle FAQs

Optimising the Cash Conversion Cycle (CCC) can be done in three ways: by improving inventory management, and/or accounts receivable, and/or accounts payable. This can be done by implementing practices such as reducing inventory levels, streamlining the collection process by offering early payment discounts, and using technology to efficiently manage accounts receivable. In addition, negotiating more favourable payment terms with suppliers can extend the accounts payable period.

Although a high CCC is often a symptom of low efficiency, it can benefit companies by allowing more flexibility in payment terms to customers, which can strengthen business relationships and increase sales. It can also indicate greater investment in inventory, ensuring product availability and avoiding stock-outs. This can be strategic in sectors where maintaining ample inventories is crucial to meet demand and remain competitive in the marketplace.

While a low CCC is often a sign of efficiency, it can also have risks such as insufficient inventory, which affects sales, overly aggressive collection policies that can damage customer relationships, and short supplier payment terms that can affect the stability of the supply chain.

Supply Chain Tactics