cash conversion is the time it take cash to be available after the item has been sold

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Cash conversion is the time it take cash to be available after the item has been sold. The first part of the formula, days inventory outstanding (DIO), measures the number of days a company takes to convert its inventory into sales (Cagle, Campbell & Jones, 2013). The second part of the CCC formula, days receivables outstanding (DRO), measures the number of days a company takes to collect on sales. (Cagle, Campbell & Jones, 2013). The third part of the formula, days payables outstanding (DPO), measures the number of days the company is able to defer payment of its accounts payable (Cagle, Campbell & Jones, 2013). Cash conversion is a great benefit for any company because it reflects what’s in stock and shows how long a item has been in stock. This is how companies can determine whats selling and whats not.

Example: CCC = Days Inventory Outstanding + Days Receivables Outstanding ÷ Days Payables Outstanding This equation can be expanded as follows: CCC = [Average Inventory ÷ (Cost of Goods Sold ÷ 365)] + [Average Accounts Receivable ÷ (Net Sales ÷ 365)] − [Average Accounts Payable ÷ (Cost of Goods Sold ÷ 365)] (Cagle, Campbell & Jones, 2013).

Cagle, C. S., Campbell, S. N., & Jones, K. T. (2013). Analyzing liquidity: Using the cash conversion cycle. Journal of Accountancy, 215(5), 44-48.