Cash Conversion Cycle: Formula, DIO, DSO & DPO
Definition
The cash conversion cycle (CCC) is the number of days between paying for raw material and collecting cash from the customer for the finished goods: days inventory outstanding plus days sales outstanding minus days payables outstanding.
| Term | Cash conversion cycle |
|---|---|
| In Hindi | नकद रूपांतरण चक्र |
| Area | Accounting |
| Search phrase | cash conversion cycle |
| Try it | Working capital blocked in inventory |
नकद रूपांतरण चक्र — हिंदी में अर्थ
नकद रूपांतरण चक्र वह दिनों की संख्या है जो कच्चे माल का भुगतान करने से लेकर ग्राहक से तैयार माल का पैसा मिलने तक लगती है: स्टॉक के दिन + वसूली के दिन − सप्लायर भुगतान के दिन।
Formula
CCC = DIO + DSO − DPO. DIO (days inventory outstanding) = Average inventory ÷ Cost of goods sold × 365. DSO (days sales outstanding) = Average debtors ÷ Credit sales × 365. DPO (days payables outstanding) = Average creditors ÷ Credit purchases (or COGS) × 365.
The longer the cycle, the more working capital the business must fund from its own money or a cash credit limit. A shorter cycle frees cash without a single extra sale.
Shortening the cycle
Cut DIO by clearing slow and dead stock and buying closer to need. Cut DSO by invoicing on dispatch, chasing overdue bills weekly and offering early-payment discounts. Watch DPO carefully: payments to micro and small enterprise suppliers must be made within the agreed period, capped at 45 days, under the MSMED Act — and unpaid dues beyond that are disallowed as an expense under section 43B(h) of the Income-tax Act until paid.
Example
DIO 60 days + DSO 75 days − DPO 45 days = 90 days. With sales of ₹3.65 crore a year (₹1 lakh a day), cutting DSO by 15 days releases about ₹15 lakh of cash.
Related tools and guides
Frequently asked questions
What is a good cash conversion cycle?
Shorter is better. For Indian engineering SMEs, 60–120 days is common; compare yourself with your own past and your industry.
Can the cash conversion cycle be negative?
Yes, if suppliers are paid after customers pay — common in retail, rare in manufacturing.
What is the difference between operating cycle and CCC?
The operating cycle is DIO + DSO. The CCC deducts DPO, because supplier credit funds part of that time.
Why does CCC matter to banks?
Working capital limits are sized on the cycle — the longer it is, the larger the limit you need.
Related terms
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already supplied on credit. It is shown as trade receivables (debtors) under current assets.
- Accrual vs cash basis of accountingUnder the accrual (mercantile) basis, income and expenses are recorded when they are earned or incurred, whatever the payment date. Under the cash basis, they are recorded only when cash is actually received or paid.
- Balance sheetA balance sheet is a statement of what a business owns (assets) and what it owes (liabilities and owners' equity) on a particular date. Total assets always equal total equity plus liabilities.
- Contra entryA contra entry is a transaction between cash and bank accounts of the same business — such as cash deposited into the bank or cash withdrawn for office use — where both the debit and the credit side are cash or bank.
- Contribution marginContribution margin is selling price minus variable cost. It is the amount each sale contributes first towards fixed costs and then to profit; as a percentage of sales it is called the contribution margin ratio or P/V ratio.
- Cost of goods sold (COGS)Cost of goods sold (COGS) is the direct cost of the goods a business sold in a period: Opening stock + Purchases + Direct expenses − Closing stock.