Working Capital 401: Cash Conversion Cycle (CCC)

We've covered working capital a few times in the past...

• 101 – What is working capital​
• 201 – Working capital drivers​
• 301 – Optimizing & analyzing working capital​

But today we're covering probably the all-time most useful ratio when it comes to managing working capital... the Cash Conversion Cycle (CCC).

What is it?

Your CCC measures how long (measured in days) it takes a dollar of cash to move through your business, from start to finish. Think of it this way, you're a retailer and you just placed an order for 1,000 units of your best-selling product; how long until that comes back to you in the form of cash collected? That's your CCC.

Plain and simple. Want to free up more cash? Bring this number down. There are even rare business models with a negative cash cycle, meaning they get paid before they shell out cash to suppliers or inventory.

How to calculate it

Starting with some basic formulas you'll need to know...

• Working capital = A/R + Inventory - A/P
• Cash Conversion Cycle = DSO + DIH - DPO
• DSO, DIH, DPO outlined below:

What we're measuring is: 1) the average length of time we hold onto inventory before we sell it plus 2) the average length of time it takes us to collect from our customers minus 3) the average length of time we take to pay our supplier bills.

Remember, working capital is expressed in dollars, it's the dollar amount you have tied up in those accounts. CCC is expressed in days, it's how long it takes those dollars to come back around in the form of a collected sale.

Why is this so important?

As mentioned, it's one number to rule them all when it comes to measuring this. Pretty sweet. Plus, it's measured in days which is intuitive for owners and employees. Those days are easily translated to dollars to measure cash impact too.

Usually, your CCC is the limiting factor when it comes to: 1) turning profits into cash flow; and 2) growing your business. Both of which are on most business owners' bingo card.

How I use CCC

In our businesses (retail, distribution, ecommerce) and for clients, I measure CCC at least quarterly. Competitor data is easy to get; so it isn't hard to get a read on what's good for your industry.

Honestly, I care less about the industry and more about my absolute number. I want it to be as low as possible. Here's a cheat sheet for the value of a 1-day improvement in CCC based on various working capital levels. For example, if I have $1m tied up in WC with a 50 day CCC, then a 1-day improvement in my CCC will net $20k in cash back to my company.

Example: Home Depot

Look at Home Depot... from 2007-2019 they drove a massive improvement in CCC from 52 days down to 37 days (top part of the chart). As a result, their operating cash flow (bottom part of the chart) ballooned from ~$6bn to $13bn. Nice!

Key Takeaway

Do you know how long it takes a single dollar to work its way through your business? If you're at 100 days or higher, you've got some work to do (but major opportunity as well). Keep hacking away using the strategies laid out in our working capital 301 article (linked above) or in our cash flow course.

This is a bit of an advanced concept so study your turnover and days ratios and reach out for help as needed.