Cash Conversion Cycle

Calculate the cash conversion cycle from operating data.

Problem Scenario

Annual sales $2M, COGS $1.2M. Average inventory $150K, receivables $200K, payables $100K.

Given Data

Sales$2,000,000

COGS$1,200,000

Avg Inventory$150,000

Avg Receivables$200,000

Avg Payables$100,000

Requirements

Calculate DIO, DSO, DPO
Find cash conversion cycle

Solution

Step 1:

DIO = (Inventory/COGS) × 365 = (150K/1.2M) × 365 = 45.6 days.

Step 2:

DSO = (Receivables/Sales) × 365 = (200K/2M) × 365 = 36.5 days.

Step 3:

DPO = (Payables/COGS) × 365 = (100K/1.2M) × 365 = 30.4 days.

Step 4:

CCC = DIO + DSO - DPO = 45.6 + 36.5 - 30.4 = 51.7 days.

Final Answer

Cash conversion cycle ≈ 51.7 days. Cash is tied up for about 52 days on average.

Key Takeaways

✓Shorter CCC means less cash tied in operations
✓DPO uses COGS, not sales

Common Errors to Avoid

✗Using sales instead of COGS for inventory and payables ratios
✗Mixing up the signs

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FAQs

Common questions about this problem type

Yes. Some businesses collect cash before paying suppliers (e.g., Amazon), resulting in negative CCC.

Use COGS. Inventory is recorded at cost, so dividing by sales would overstate turnover. DIO = (Avg Inventory / COGS) x 365. DSO uses sales because receivables include the selling price.