Dickinson Bransford, CM&AA, Managing Director [email protected]; (415) 294-0002

Cash Conversion Cycle (CCC)

= Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)

Each component is calculated as both a time period in days and a ratio, expressed as the # of times during the accounting period that a cycle occurs. 365 days is indicated below for a year; substitute as appropriate, e.g. 90 days for a quarter, ensuring that all other figures align with that time period.

Inventory Turnover

1. From income statement, find Cost of Goods Sold (COGs) for the total period, e.g. the year or the quarter 2. From balance sheets, calculate the Average Inventory for the period: (Beginning inventory + Ending inventoryi) / 2 3. Inventory Turnover Ratio (ITR) = Total COGS for the period/Average Inventory

Days Inventory Outstanding (DIO), also known as Days on Hand = Days in Period, e.g. 365 or 90 / ITR

Receivables Turnover

4. From income statement, find total Accounts Receivable, in other words sales made on credit for the period (see footnote) ii 5. From balance sheets, calculate Average Accounts Receivable for period using beginning + ending formula above. 6. Receivables Turnover Ratio (RTR) = Total Accounts Receivable/Average Accounts Receivable

Days Sales Outstanding (DSO) = 365 / RTR

Payables Turnover

7. “Purchases” is not a typical income statement line item, since it’s reflected in COGs. To derive it, add COGs in step 1. to ending inventory used in step 2., then subtract beginning inventory also used in step 2. 8. From the balance sheets, calculate the Average Accounts Payable for the period as above. 9. Payables Turnover Ratio (PTR) = COGS/Average Accounts Payable

Days Payable Outstanding (DPO) = 365 / PTR

Now, to calculate the Cash Conversion Cycle…

DIO + DSO – DPO

Compare Across Time Periods and Against Industry Norms

Industry norms are often found in trade publication articles. That information is most useful when comparing like companies, e.g. small private companies in the industry vs. others, instead of against large publicly traded firms.

i For finer granularity, can average more than two data points in the period, e.g. a four-quarter average using the end of each quarter period, or semi-annual calculation of beginning, middle and end of year. (especially useful for seasonal businesses) ii When researching industry norms, be aware that credit sales are not always available for other companies, so analysts will substitute Average Revenue. Be sure to match your calculation to the outside source.

Cash Conversion Cycle Calculation_DIO+DSO-DPO.docx