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The cash conversion cycle measures how many days your cash is tied up between paying suppliers and collecting from customers. The formula, a worked example and the levers that shorten it.
Short answer: the cash conversion cycle (CCC) is the number of days your cash is tied up between paying for stock and collecting from customers. CCC = days inventory outstanding + days sales outstanding − days payable outstanding. With 70 stock days, 60 customer days and 50 vendor days, the cycle is 80 days. Each day you cut frees one day of cost of goods sold in cash.
Next step: see the three ratios and the cycle by business unit and month in the dashboard below (Day ratios tab). Click any cell to see what is behind it.
The formula
CCC = DIO + DSO − DPO
- DIO: days your stock sits before it is sold.
- DSO: days your customers take to pay.
- DPO: days you take to pay your vendors.
Worked example
| Ratio | Days |
|---|---|
| Days inventory outstanding | 70 |
| + Days sales outstanding | 60 |
| − Days payable outstanding | 50 |
| Cash conversion cycle | 80 days |
With $7.2M of annual cost of goods sold ($20,000 a day), 80 days means about $1.6M of working capital tied up. Cutting the cycle by 10 days frees about $200,000.
The levers
- Collect faster: invoice on shipment, automatic reminders, credit holds. Each day of DSO counts the same as a day of stock.
- Hold less stock: reorder points from real demand, monthly review of slow movers.
- Pay on terms, not early: schedule payments by due date and negotiate terms with key suppliers.
- Measure it every month, by business unit: a group average hides the unit that is consuming the cash.
Why it matters
Growing companies often run short of cash while being profitable: more sales mean more stock and more receivables before any cash comes in. The cycle tells you how much working capital each extra unit of sales will need, and the 13-week cash flow forecast tells you when.
The cycle in Business Central
Aged receivables, aged payables and inventory valuation give the three inputs at any date. A dashboard like the one above calculates them by business unit and month and adds the cycle, so management sees it every month instead of once a year.
FAQ
Can the cycle be negative? Yes, when customers pay before you pay suppliers, as in some retail. Cash then funds growth instead of consuming it.
Which period should I use? A quarter (90 days) to see changes quickly; the full year for comparisons. Use the same one for the three ratios.
Is it the same as the operating cycle? No: the operating cycle is DIO + DSO; the cash conversion cycle subtracts the days your suppliers finance.
Related: credit control and inventory carrying cost.
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