Cash conversion cycle
AccountingDays inventory plus days receivable less days payable: how long cash is tied up between paying for stock and collecting from the customer.
Also written: CCC, working capital cycle, cash cycle
The cycle turns three balance sheet lines into one number that does not scale with the size of the business, which is what makes it comparable across a peer set and across time. It is days inventory outstanding plus days sales outstanding less days payable outstanding.
Read it physically. The company pays a supplier, holds the goods for a while, sells them, and then waits to be paid. Days inventory and days receivable are the periods it is out of pocket. Days payable is the interest free credit the supplier granted, which offsets part of it. What remains is the number of days of trading the company has to fund itself.
The first use is funding. Growth multiplies the balances, so a business growing 20% on unchanged terms puts 20% more cash into working capital before any of the extra profit arrives. The second use is testing a claim: shortening the cycle releases cash once and then stops, so a working capital release is never a run rate improvement in cash generation, however it is presented.
A negative cycle, where suppliers are paid after customers have paid, is a real structural advantage and appears in grocery, low cost airlines and subscription software. Be honest about the other half of it: the same structure reverses violently if volumes fall, because payables run off faster than receivables come in.
Worked example
A distributor with revenue of €730M and cost of sales of €547.5M has daily revenue of €2.0M and daily cost of sales of €1.5M.
Inventory of €120M is 80 days, receivables of €110M are 55 days, payables of €60M are 40 days, so the cycle is 95 days and operating working capital is €170M.
Grow revenue 20% on the same terms and working capital rises to €204M, absorbing €34M of cash. Cutting stock to 65 days would release €22.5M, once.