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What is Average Cash Conversion Cycle?

The Average Cash Conversion Cycle (CCC) is a financial metric that measures the time it takes for a company to convert its investments in inventory and other resources into cash from sales. It is a comprehensive indicator encompassing the entire process, from purchasing inventory to receiving customer payments.

Importance of Average Cash Conversion Cycle in Accounting:

  1. Efficiency Measurement:
  1. Liquidity and Financial Health:
  1. Operational Effectiveness:

Advantages of Average Cash Conversion Cycle:

  1. Optimized Working Capital:
  1. Improved Financial Planning:

Disadvantages of Average Cash Conversion Cycle:

  1. Industry Variability:
  1. Overemphasis on Short-Term Metrics:

Example of Average Cash Conversion Cycle for a Wholesaler or Retailer Business:

Consider a retail company that purchases inventory from suppliers, sells products to customers on credit, and then collects payments. The CCC for this retailer would involve:

  1. Days Inventory Outstanding (DIO):
  1. Days Sales Outstanding (DSO):
  1. Days Payable Outstanding (DPO):

The CCC is then calculated using the formula: CCC = DIO + DSO – DPO.

A shorter CCC for this retailer would indicate that it efficiently manages inventory, collects customer payments promptly, and takes advantage of favorable credit terms with suppliers. This efficiency contributes to improved cash flow and operational effectiveness.

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