Answers how long it takes your company to convert investments in inventory into cash flows from Sales.
The cash conversion cycle (CCC) is a metric that measures the number of days a company takes to convert the stock and inventory investments they’ve made into revenue from sales. The point is to measure the time between your investment (in inventory) and your return on that investment (through sales). This measurement can give you a sense of the health of your business and help you measure risk.
If the cash conversion cycle is shortening, this is a good sign as your business is leaving less and less cash tied up somewhere as you grow. It is a negative sign if the cash conversion cycle of your company is increasing or getting slower because it means more of your cash is being tied up for longer.
DIO = (Total Inventory: Finished Goods / Cost of Goods Sold) * Number of Days
DSO = (Accounts Receivable / Net Revenue) * Number of Days
DPO = (Accounts Payable / Cost of Goods Sold) * Number of Days
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