What is cash conversion cycle: Meaning, Formula & Role in Business Efficiency

The Cash Conversion Cycle (CCC) shows how many days a business takes to turn what it spends on stock and operations into cash from customers. It adds the time to sell stock and collect money, then subtracts the time taken to pay suppliers.

Radhika Talwar’s Business Journey: A Cash Flow Turnaround

Radhika Talwar runs a successful organic skincare business in Bengaluru. In 2024, her average stock was worth ₹1,200,000, and she spent ₹7,200,000 on goods during the year. She had ₹600,000 in unpaid customer invoices from ₹9,600,000 in yearly credit sales. At the same time, she owed her suppliers ₹900,000.

Here’s how her cash conversion cycle worked:
 

• Days Inventory Outstanding (DIO) = (₹1,200,000 ÷ ₹7,200,000) × 365 = 60.8 days
   
• Days Sales Outstanding (DSO) = (₹600,000 ÷ ₹9,600,000) × 365 = 22.8 days
   
• Days Payable Outstanding (DPO) = (₹900,000 ÷ ₹7,200,000) × 365 = 45.6 days
   

So, CCC = 60.8 + 22.8 – 45.6 = 38 days

This means Radhika turned her investment into cash in just 38 days. A year earlier, it took her 68 days. She improved this by managing her stock better and getting longer credit terms from suppliers. As a result, she freed up ₹1,500,000 in cash, which she used to grow her business, investing in marketing and new product development. By early 2025, her stronger cash flow helped attract interest from investors.

Cash Conversion Cycle Formula and Key Components

The Cash Conversion Cycle (CCC) shows how many days a business takes to turn money spent on stock and supplies into cash received from customers. It adds the time taken to sell stock and collect payments, then subtracts the time taken to pay suppliers.

Formula: CCC = DIO + DSO − DPO

The Three Main Parts of CCC:

1. DIO: Days Inventory Outstanding

DIO shows how long you hold stock before selling it.
Formula: (Average Inventory ÷ Cost of Goods Sold) × 365

Example: Marico Ltd., which sells hair oil and personal care products, has a DIO of around 45–50 days. That means it sells its stock fairly quickly.

2. DSO: Days Sales Outstanding

DSO tells you how many days it takes to collect money from your customers.
Formula: (Average Receivables ÷ Credit Sales) × 365

Example: Infosys Ltd., an IT company, usually waits 65–70 days to get paid after providing services. That’s because many of its clients pay on credit.

3. DPO: Days Payable Outstanding

DPO shows how long you take to pay your suppliers.
Formula: (Average Payables ÷ COGS) × 365

Example: DMart (Avenue Supermarts) takes over 100 days to pay its suppliers. This gives it more time to use the cash in its business.

Example: Radhika’s Ayurveda Skincare Business

Radhika runs a small skincare company in India. These are her numbers for the year:

• Average Inventory: ₹12,00,000
• COGS (Cost of Goods Sold): ₹72,00,000
• Average Receivables: ₹6,00,000
• Credit Sales: ₹96,00,000
• Average Payables: ₹9,00,000

Now let’s calculate her CCC:

• DIO = (12,00,000 ÷ 72,00,000) × 365 = 60.8 days
• DSO = (6,00,000 ÷ 96,00,000) × 365 = 22.8 days
• DPO = (9,00,000 ÷ 72,00,000) × 365 = 45.6 days
• CCC = 60.8 + 22.8 − 45.6 = 38 days

So Radhika takes 38 days to turn the money she spends into money she earns. A year earlier, her CCC was 65 days, but she made changes like speeding up stock turnover and offering discounts for early payments. This helped her free up ₹15,00,000, which she used to grow her business.

Easy Tips to Improve CCC
 

1. Reduce DIO:
   • Don’t overstock. Buy only what sells quickly.
   • Use inventory tracking apps.
      
2. Lower DSO:
   • Ask customers to pay on time.
   • Give small discounts for early payments.
   • Send invoices quickly.
      
3. Increase DPO (Carefully):
   • Ask suppliers for more time to pay.
   • But don’t delay too much, you may lose trust.

Why CCC Matters
 

• Shorter CCC = Faster Cash Flow: You don’t need to borrow as much.
   
• More Control: You’ll know how well you’re managing stock, payments, and suppliers.
   
• Better Growth: You can invest cash back into the business instead of waiting on customer payments.

Why the Cash Conversion Cycle Matters for Business Efficiency?

To understand why the Cash Conversion Cycle (CCC) is important for business success, here’s a helpful table that shows how it affects different parts of a company’s financial health with the help of Samantha imports:
 

By keeping an eye on her CCC, Samantha Imports can manage cash better, reduce delays, and grow the business more efficiently. 

How to Analyse a Good or Bad Cash Conversion Cycle?

To know if your Cash Conversion Cycle (CCC) is good or bad, you need to look at it over time, compare it to others in your industry, and check each part of the cycle. Here’s an easy guide to help you judge it.
 

So, for Samantha and other businesses, watching CCC regularly can lead to better decisions and stronger performance.

Samantha Imports: Example

Samantha Imports has the following figures:

• DIO (Stock held): 50 days
• DSO (Customer payments): 30 days
• DPO (Supplier payments): 45 days

CCC = 50 + 30 − 45 = 35 days

If other companies in her industry have an average CCC of 50 days, then Samantha’s 35-day CCC is better than average. She collects her money faster, which gives her more cash to grow the business or pay bills on time.

Note:
 

• A lower CCC is usually a sign that your business is healthy and efficient.
   
• A negative CCC (where you get paid before paying suppliers) is excellent, especially in retail, but it must be managed carefully.
   
• Always look at CCC trends, compare with others in your field, and break it down to see where delays come from.
   
• Improving CCC helps you free up cash, reduce borrowing, and run your business more smoothly.

Conclusion

The Cash Conversion Cycle helps business owners understand how fast they can turn their investments into usable cash. A shorter CCC means better cash flow, lower costs, and more flexibility. By keeping track of CCC, businesses can make smarter decisions and grow with more confidence.

FAQs
 

1. Why is a negative Cash Conversion Cycle a good thing?
A negative CCC means your business gets paid by customers before you need to pay suppliers. This gives you extra cash to use, and it's common in businesses like supermarkets or online marketplaces.

2. Can small businesses use the CCC?
Yes! Even small shops or home-run businesses can use CCC to track how quickly they turn products into cash. It helps avoid cash shortages and keeps operations running smoothly.

3. What part of the CCC should I fix first if it’s too long?
Start with what’s causing the delay. If stock is sitting too long, reduce inventory. If customers pay late, improve your payment terms. If you’re paying suppliers too quickly, try to extend your payment period (if it won’t hurt relationships).

4. Does a good CCC guarantee profit?
No, but it helps. A short CCC improves cash flow, but you also need strong sales and cost control to stay profitable. CCC is just one part of a bigger financial picture.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.