CASH CONVERSION CYCLE (CCC)

GROUP 1:

1. Rishabh Gupta
2. Mohd. Yunus
3. Sajeev George
4. M Ubaid
5. Sandeep S.
6. Dherya Jain
CONTENTS

1 Introduction

2 Calculating the Cash Conversion Cycle

3 Cash Conversion Cycle Formula

4 How to analyze CCC?

5 How to improve CCC?

Introduction
Definition

The cash conversion cycle (CCC) – also known as the cash cycle – is a working
capital metric which expresses how many days it takes a company to convert cash
into inventory, and then back into cash via the sales process. 
Introduction
CCC – Salient Points

 The CCC is an important metric for companies that buy and

manage inventory

 It is an indication of operational efficiency as well as financial

health.

 The shorter a company’s CCC, the less time a company has

cash tied up in its accounts receivable and inventory.

 That said, it should not be looked at in isolation, but in

conjunction with other financial metrics such as return on equity.
Calculating Cash Conversion Cycle
CCC – Salient Points

The cash conversion cycle encapsulates three key stages of a company’s sales
activity:

 Selling current inventory

 Collecting cash from current sales
 Paying vendors for goods and services purchased

CCC is calculated using three other working capital metrics:

A. Days Inventory Outstanding (DIO)

B. Days Sales Outstanding (DSO) 
C. Days Payable Outstanding (DPO)
 Cash Conversion Cycle Formula

CCC = DIO + DSO – DPO

• DIO = Days Inventory Outstanding (average inventory/cost of goods sold x

number of days)
• DSO = Days Sales Outstanding (accounts receivable x number of days/total
credit sales)
• DPO = Days Payable Outstanding (accounts payable x number of days/cost of
goods sold)
DIO
Days Inventory Outstanding (DIO)

Days Inventory Outstanding (DIO) is the number of days, on average, it takes a

company to turn its inventory into sales. Essentially, DIO is the average number of
days that a company holds its inventory before selling it.

Example: Company A reported a $1,000 beginning inventory and $3,000 ending

inventory for the fiscal year ended 2018 with $40,000 cost of goods sold. Calculate
DIO.
DIO
Days Inventory Outstanding (DIO)

Example: Company A reported a $1,000 beginning inventory and $3,000 ending

inventory for the fiscal year ended 2018 with $40,000 cost of goods sold. Calculate
DIO.

Therefore, it takes this company approximately 18 days to turn its

inventory into sales.
DSO
Days Sales Outstanding (DSO)

Days Sales Outstanding (DSO) is the number of days, on average, it takes a

company to collect its receivables. Therefore, DSO measures the average number
of days for a company to collect payment after a sale.

Example: Company A reported $4,000 in beginning accounts receivable and

$6,000 in ending accounts receivable for the fiscal year ended 2018, along with
credit sales of $120,000. Calculate DSO.
DSO
Days Sales Outstanding (DSO)

Example: Company A reported $4,000 in beginning accounts receivable and

$6,000 in ending accounts receivable for the fiscal year ended 2018, along with
credit sales of $120,000. Calculate DSO.

Therefore, it takes this company approximately 15 days to collect a

typical invoice
DPO
Days Payable Outstanding (DSO)

Days Payable Outstanding (DPO) is the number of days, on average, it takes a

company to pay back its payables. Therefore, DPO measures the average number
of days for a company to pay its invoices from trade creditors, i.e., suppliers.

Example: Company A posted $1,000 in beginning accounts payable and $2,000 in

ending accounts payable for the fiscal year ended 2018, along with $40,000 in cost
of goods sold. Calculate DPO.
DPO
Days Payable Outstanding (DSO)

Example: Company A posted $1,000 in beginning accounts payable and $2,000 in

ending accounts payable for the fiscal year ended 2018, along with $40,000 in cost
of goods sold. Calculate DPO.

Therefore, it takes this company approximately 13 days to pay for its

invoices.
Calculating CCC
Cash Conversion Cycle

CCC = DIO + DSO – DPO

For Company A: CCC = 18.25 + 15.20 – 13.69 = 19.76

Therefore, it takes Company A approximately 20 days to turn its initial

cash investment in inventory back into cash
Analyzing CCC
Cash Conversion Cycle

 The typical length of the cash conversion cycle will vary considerably between
different industries meaning there is no single figure that represents a ‘good’ or
‘bad’ cash conversion cycle.

 However, it can be useful to compare the CCC of two companies within the same
industry.

A lower CCC may indicate that one company is managing its working capital
more effectively than the other.

 It can also be useful to track the CCC of an individual company over time, as this
can demonstrate whether the business is becoming more or less efficient.
Negative CCC
Cash Conversion Cycle

 While the cash conversion cycle is usually a positive figure, some companies may
have a negative cash conversion cycle.

In this situation, the company is effectively receiving payments for the goods it
sells before paying its suppliers for materials.

 This can be achieved through a combination of selling inventory rapidly,

collecting payment from customers promptly, and paying the company’s
suppliers at a later date

 Typically, a negative cash conversion cycle is associated with highly efficient

online retailers
Improving CCC CCC = DIO + DSO – DPO
Cash Conversion Cycle

In order to improve (reduce) the CCC, companies can focus on any of its three
components. Increasing DPO, reducing DSO or reducing DIO will all reduce
the CCC. Companies can therefore improve the cash conversion cycle and
avoid common cash flow problems in one of several ways:

 Convert inventory into sales faster

 Collect payment from customers sooner
 Extend the time taken to pay suppliers
CCC of Top Companies

SL No. Company Cash Conversion Cycle

1 Amazon -25 Days

2 Microsoft -15 Days
3 Tesla -11 Days
4 Netflix -2 Days
5 Apple -62 Days
6 Reliance Industries -84.79 Days
7 ITC Limited 13.78 Days
8 Adani -15.18 Days
9 Vedanta -23.92 Days
10 Aditya Birla Group -154.82 Days
CCC of Amazon
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

-25
-27
-30 -31
-34 -33
-35 -35

-42
*Number of Days -46

Amazon’s Last 5 Years’ (2017-21) Average CCC stands at -35 Days

CCC of Amazon

From 2017-21, Amazon was able to keep DSO Constant and reduce DIO by
15% and marginal increase of 3% in DPO
CCC of Amazon
Analysis
Amazon's cash conversion cycle is negative, meaning it is generating
revenue from customers before it has to pay its suppliers for inventory,
among other things.

Amazon's cash cycle has become less negative over the past 5 years, but
this trend is driven primarily by DSO growth, not DPO contraction.

The company has to keep growing quickly to drive the negative cash
cycle, even if the businesses don't make money, which they currently
don't..

In the last year, Amazon recorded a net cash gain of $699 million from
services -- or costs -- it hasn't yet performed for customers.
CCC of Walmart
*Number of Days

12 12
11
10

2 2
1

2013 2014 2015 2016 2017 2018 2019 2020 2021

Walmart’s Cash Conversion Cycle hits all time low to 1 Day in 2021
CCC of Amazon vs Walmart
*Number of Days

Amazon Walmart
104
95 94 94

42 43 42 44 41 43 42
44 42 39
35 38

17 19 17 18
4 4 4 4
2018 2019 2020 2021
2018 2019 2020 2021

Amazon’s DPO higher by +147% over Walmart (2021)

THANK YOU