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Why is a healthy Cash Conversion Cycle (CCC) important to a business?

Adequate cash flow is vital to the sustainability of a business.  The Cash Conversion Cycle (CCC) measures the number of days that a business takes to convert its resources into cash, making it a very useful Key Performance Indicator (KPI).

Generally speaking the CCC KPI considers the following balance sheet accounts:
1.    Inventory / Stock
2.    Work in Progress
3.    Trade Debtors / Receivables
4.    Trade Creditors / Payables
5.    Bank / Cash

The CCC KPI is affected by the following questions:
1.    How long does it take to sell the Inventory?
2.    How long it takes to convert the Work in Progress to Sales?
3.    How long it takes to convert Trade Debtors to Cash, i.e. how long it takes to collect them?
4.    How long do you have to pay your debts?

The Formula for Cash Conversion Cycle is CCC = DIO + DSO - DPO
DIO Days Inventory Outstanding
DSO Days Sales Outstanding
DPO Days Payables Outstanding

The smaller the result the better for the business.


If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
Phone +61 3 9428 1062

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