cash conversion cycle

The time in days that takes for a company to convert its production inputs into cash flows.  

-To estimate:

Cash conversion cycle (CCC) = Days sales of inventory (DSI) + Days sales outstanding (DSO) - Days payable outstanding (DPO)

-A company purchases inventory of credits, moreover, a company can sell products on credit. On balance, cash implicates that the company collects the accounts payable and accounts receivable. So the cash conversion cycle is calculated as the time between outlay of cash and cash recovery.

-A Company can convert its products in cash through sales quickly. It is better to shorten the cycle and to decrease the capital invested as much as possible. In this way the bottom line is better off.

Two types of cycle:

-SHORT Cash Conversion Cycle
Account receivables and inventory have to be maintained just for a short lapse of time. Often this can be considered as an indicator of solid cash-collection performances as well as good inventory management and credit sales.

-LONG Cash Conversion Cycle

It could mean that the firm takes longer to collect the cash or to sell to its customers but, as well, a possible explanation could be that bills are paid as soon as they arrive.

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