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Business Activities Days Inventory Outstanding: CCC Dio + Dso - Dpo

The cash conversion cycle (CCC) measures the average number of days it takes for a company to convert its resources into cash. It is calculated as CCC = DIO + DSO - DPO, where DIO is days inventory outstanding, DSO is days sales outstanding, and DPO is days payable outstanding. DIO measures the average number of days it takes to sell inventory, DSO measures the average number of days it takes to collect payment from customers, and DPO measures the average number of days the company takes to pay its suppliers. A lower CCC is better as it means the company is more efficiently converting its resources into cash. The example calculates the CCC for a fictional retailer as 83 days based

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45 views2 pages

Business Activities Days Inventory Outstanding: CCC Dio + Dso - Dpo

The cash conversion cycle (CCC) measures the average number of days it takes for a company to convert its resources into cash. It is calculated as CCC = DIO + DSO - DPO, where DIO is days inventory outstanding, DSO is days sales outstanding, and DPO is days payable outstanding. DIO measures the average number of days it takes to sell inventory, DSO measures the average number of days it takes to collect payment from customers, and DPO measures the average number of days the company takes to pay its suppliers. A lower CCC is better as it means the company is more efficiently converting its resources into cash. The example calculates the CCC for a fictional retailer as 83 days based

Uploaded by

Anonymous o7bJ7zR
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CCC = DIO + DSO - DPO

Let's look at each component and how it relates to the business activities discussed above.
Days Inventory Outstanding (DIO): This addresses the question of how many days it takes to sell
the entire inventory. The smaller this number is, the better.
DIO = Average inventory/COGS per day
Average Inventory = (beginning inventory + ending inventory)/2
Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and
involves AR. While cash-only sales have a DSO of zero, people do use credit extended by the
company, so this number will be positive. Again, smaller is better.
DSO = Average AR / Revenue per day
Average AR = (beginning AR + ending AR)/2
Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. If
this can be maximized, the company holds onto cash longer, maximizing its investment potential;
therefore, a longer DPO is better.
DPO = Average AP/COGS per day
Average AP = (beginning AP + ending AP)/2
Notice that DIO, DSO and DPO are all paired with the appropriate term from the income
statement, either revenue or COGS. Inventory and AP are paired with COGS, while AR is paired
with revenue.
Example
Let's use a fictional example to work through. The data below is from a fictional retailer
Company X's financial statements. All numbers are in millions of dollars.
Item

Fiscal Year 2013

Fiscal Year 2012

Revenue

9,000

Not needed

COGS

3,000

Not needed

Inventory

1,000

2,000

A/R

100

90

A/P

800

900

Average Inventory

(1,000 + 2,000) / 2 = 1,500

Average AR

(100 + 90) / 2 = 95

Average AP

(800 + 900) / 2 = 850

Now, using the above formulas, CCC is calculated:


DIO = $1,500 / ($3,000/ 365 days) = 182.5 days
DSO = $95 / ($9,000 / 365 days) = 3.9 days
DPO = $850 / ($3,000/ 365 days) = 103.4 days
CCC = 182.5 + 3.9 - 103.4 = 83 days
Read more: Understanding The Cash Conversion Cycle | Investopedia
http://www.investopedia.com/articles/06/cashconversioncycle.asp#ixzz4P2XYrDbQ
Follow us: Investopedia on Facebook

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