Cash Conversion Cycle - CCC

The cash conversion cycle measures how long it takes for a business to convert resources (like inventory) into cash. Businesses need to know roughly how long it takes for them to move product along and bring money back into the business, so they can gauge how much to hold back from spending at any given time. A company with a long cycle should keep more cash on hand, because it might be awhile before that cash invested in products comes home to roost.

Usually, the cycle is measured in a number of days, and looks at the time it takes to sell the inventory, and collect the money (receivables). Assuming the business buys items on credit (accounts payable) then sells on credit (accounts receivable), the cash conversion cycle would measure the time between the two accounts.

You know the guy who sells flip flops or sunglasses at the beach? Just sorta sets up where the market is, pops up outta nowhere and tries to guilt you into crap you don't want...yeah, that guy. Say he buys 100 pairs of flip-flops to put into inventory, on credit for $100. He intends to hawk them to unsuspecting beach goers for $5 each, for $500 total, showing a profit of $400. The cash conversion cycle will measure how many days it takes between spending the first $100 and collecting that last dollar of the $500.

As you would guess, the cycle varies a great deal throughout the year (think holiday rush). Or for the flip-flop guy, it would vary on how persistent (annoying) he is.