Introduction
The Cash Conversion Cycle (CCC) is the definitive metric of working capital efficiency. Measures how many days pass from when you pay for inventory until you collect from customers.
Explanation
CCC combines three components: DIO (inventory), DSO (collections), DPO (payments to suppliers). CCC = DIO + DSO - DPO. A low or negative CCC is excellent; high is problematic.
Formula
CCC = DIO + DSO - DPO
Where:
DIO = Days Inventory Outstanding
DSO = Days Sales Outstanding
DPO = Days Payables Outstanding
Example
Amazon vs Traditional Retail: - Amazon: DIO 30 + DSO 20 - DPO 90 = CCC -40 days (negative!) - Retail: DIO 60 + DSO 45 - DPO 30 = CCC 75 days Amazon collects from customers 40 days BEFORE paying suppliers. Use other people's cash.
How to read it
CCC < 0 = excellent, company charges before paying (Amazon, Dell). CCC 0-30 days = very good. 30-60 days = acceptable. > 60 days = problematic, a lot of capital tied up. Declining CCC = operational improvement. Increasing CCC = deteriorating working capital. Amazon, Dell, Costco have negative CCC ("float" model). Red flag: CCC growing from 30 to 80 days = serious working capital problems.
Key takeaways
- CCC = DIO + DSO - DPO
- Measure days to convert inventory to cash
- CCC < 0 = excellent (Amazon, Dell)
- CCC > 60 days = problematic
- Negative CCC = collect before paying
- Increasing CCC = deterioration of working capital