Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Profitability Ratios
- Profitability Ratios Formula
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio

**Table of Contents**

## What is Cash Conversion Cycle Formula?

The formula for cash conversion cycle basically represents a cash flow calculation that intends to determine the time taken by a company to convert its investment in inventory and other similar resource inputs into cash. In other words, the calculation of the cash conversion cycle determines how long cash remains invested in the form of inventory before the inventory is sold off and cash is collected from the customers. It is also known as Net Operating Cycle.

The cash conversion cycle formula has three separate parts.

- The first part is pertaining to the current inventory level and it assesses how quickly the company will be able to sell this inventory and it is represented by days inventory outstanding.
- Then, the second part is pertaining to the current sales and it asses in how much of amount of time the company is able to collect the cash from their sales and it is represented by days sales outstanding.
- The third part is the current outstanding payables and it represents by when the company will have to pay off its vendors and it is represented by days payables outstanding.

Mathematically, the formula of the cash conversion cycle is represented as,

**Cash Conversion Cycle = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)**

### Explanation of the Cash Conversion Cycle Formula

The formula for calculation of the cash conversion cycle is very simple as all the required information is easily available in the balance sheet and the income statement and it can be derived by using the following four steps:

**Step 1:** Firstly, determine the average inventory during the year which can be calculated as an average of opening inventory and closing inventory from the balance sheet. Then, the Cost of goods sold (COGS) can be computed from the income statement. Now, the DIO can be calculated by dividing average inventory by COGS and multiplied by 365 days.

**DIO = Average Inventory / COGS * 365**

**Step 2:** Next, determine the average accounts receivable during the year which can be calculated as the average of opening accounts receivable and closing accounts receivable from the balance sheet. Then, the net credit sales can be taken from the income statement. Now, the DSO can be calculated by dividing average accounts receivable by net credit sales and multiplied by 365 days.

**DSO = Average Accounts Receivable / Net credit sales * 365**

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**Step 3:** Next, determine the average accounts payable during the year which can be calculated as an average of opening accounts payable and closing accounts payable from the balance sheet. Then, the COGS can be taken from the income statement. Now, the DPO can be calculated by dividing average accounts payable by COGS and multiplied by 365 days.

**DPO = Average Accounts Payable / COGS * 365**

**Step 4:** Finally, the calculation of the cash conversion cycle (ccc) formula can be done by adding DIO and DSO while deducting DPO as below.

**Cash Conversion Cycle = DIO + DSO – DPO**

**Example of Cash Conversion Cycle Formula (with Excel Template)**

**Let us consider an example of the calculation of the cash conversion cycle for a company named PQR Ltd. As per the annual report of PQR Ltd for the financial year ended on March 31, 20XX, the following information is available.**

First, we will calculate the following for the calculation of the Cash Conversion Cycle (CCC) Formula.

**DIO (Days Inventory Outstanding)**

- DIO= ($3,000 + $5,000) ÷ 2 / $50,000 * 365
- = 29.20 days

**DSO (Days Sales Outstanding)**

DSO = ($6,000 + $8,000) ÷ 2 / $140,000 * 365

= 18.25 days

**DPO (Days Payable Outstanding)**

- DPO= ($2,000 + $4,000) ÷ 2 / $50,000 * 365
- = 21.90 days

Therefore, calculation of Cash conversion cycle (ccc) formula will be as follows –

Cash conversion cycle formula = 29.20 days + 18.25 days – 21.90 days

**Cash conversion cycle will be – **

- = 25.55 days ~ 26 days

### Cash Conversion Cycle Calculator

You can use the following Cash Conversion Cycle Calculator –

DIO | |

DSO | |

DPO | |

Cash Conversion Cycle Formula = | |

Cash Conversion Cycle Formula = | DIO + DSO - DPO | |

0 + 0 - 0 = | 0 |

### Relevance and Use of Cash Conversion Cycle Formula

It is important to understand the underlying concept of the cash conversion cycle (ccc) formula as it helps to assess how efficiently a company manages its working capital. Usually, most of the companies finance their inventory instead of paying for it upfront with cash; this results in “Accounts Payable”. On the other hand, these companies sell their inventory on credit without realizing the entire cash at the time of the sale; this results in “Accounts Receivable”. Hence, cash does not remain an issue if the company is able to collect the accounts receivable and pay the accounts payable timely.

Here, the timing is of essence from the point of view of cash management and the cash conversion cycle formula helps in tracing the lifecycle of the cash. In short, the shorter the cash conversion cycle, the better the company is doing in terms of selling inventories and recovering cash from the creditors while paying off the suppliers.

The cash conversion cycle formula can be used to compare companies in the same industry or conduct a trend analysis to assess its own performance across years. Comparison of a company’s cash conversion cycle to its competitors can be helpful to determine if the company is operating normally vis-à-vis other players in the industry. In addition, comparing a company’s current cash conversion cycle to its previous year’s cash conversion cycle can be helpful in drawing a conclusion that whether its working capital management is on the path of improvement or not.

You can Download this Cash Conversion Cycle Formula Excel Template from here – Cash Conversion Cycle Formula Excel Template

### Recommended Articles

This has been a guide to Cash Conversion Cycle (CCC) Formula. Here we discuss how to calculate Cash Conversion Cycle using practical example and downloadable excel template. You can learn more about financial analysis from the following articles –

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