Cash Conversion Cycle: How to Optimise Your Liquidity Through the Supply Chain

Have you ever wondered how long it takes your company to recover the money it invests in purchasing, producing, and selling? This figure can be revealed through the Cash Conversion Cycle (CCC), a key performance indicator that says a great deal about the financial and operational health of your business.

When the CCC is high, it means that cash is “tied up” in inventory or outstanding invoices—something that can be detrimental to your liquidity. On the other hand, a low CCC reflects agility, efficiency, and strong planning. This is where the supply chain plays a crucial role: if you manage your demand, purchasing, inventory, and receivables properly, you can significantly reduce that time.

In today’s article, we’ll explain everything you need to know about the Cash Conversion Cycle—how it’s calculated, how to interpret it, the impact it has across different sectors, and most importantly, how to optimise it through the supply chain. Let’s dive in!

What is the Cash Conversion Cycle (CCC)?

The Cash Conversion Cycle (CCC) is a financial KPI that measures the time it takes a business to convert the investment it makes in inventory and other resources into cash via sales. In other words, it represents the number of days between paying suppliers for raw materials or products and collecting payment for the final goods sold.

This cycle is fundamental for evaluating both operational and financial efficiency. A shorter CCC indicates better working capital management, translating into greater liquidity and less reliance on external funding.

How is the Cash Conversion Cycle (CCC) Calculated?

The CCC formula is:

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

• DIO (Days Inventory Outstanding): The average time (in days) that inventory stays in storage before being sold.
• DSO (Days Sales Outstanding): The average number of days it takes the company to collect payment from customers after a sale.
• DPO (Days Payable Outstanding): The average number of days the company takes to pay for raw materials or goods from its suppliers.

How to Interpret the CCC

The higher the CCC, the more likely it is that the company is financing its operations out of pocket—paying out before receiving payment for its sales. If the CCC becomes negative, we could say that the company is highly operationally efficient, collecting payment before needing to pay its suppliers.

Ideally, businesses should aim to have the lowest possible CCC, as this implies stronger liquidity and more room to invest or handle unexpected events. However, this metric should always be interpreted in context. The industry and business model can significantly affect how CCC results are analysed.

The Role of CCC in the Supply Chain

Managing CCC isn’t just a matter for finance—it’s directly tied to the supply chain. Inventory turnover, purchasing efficiency, delivery times, and credit management all play a role.

With a well-planned supply chain, you can reduce both Inventory Days and Collection Days, while also negotiating better payment terms with suppliers. All these improvements contribute to a healthier financial outlook for your business.

Practical Case: InproMeat – Supply Chain Efficiency and CCC Control

Let’s imagine InproMeat, a fictional company involved in meat production and distribution. In its day-to-day operations, it faces several challenges: excess stock of perishable raw materials, slow payment collection from HORECA clients, and little leverage in negotiating supplier payment terms.

After analysing its Cash Conversion Cycle, the following values are revealed:

• DIO: 45 days
• DSO: 60 days
• DPO: 30 days
• CCC: 45 + 60 – 30 = 75 days

That is, for 75 days, InproMeat’s money is “locked” within its operating cycle. To reduce this, the company decides to implement a supply chain planning software solution to:

• Optimise inventory management through accurate demand forecasting.
• Plan purchases based on actual turnover instead of manual estimates.
• Set alerts for slow-moving products to avoid overstocking.
• Prioritise customers with better payment histories and commercial terms.

After 6 months of using the software, InproMeat reduces its inventory days to 30, collection days to 45, and successfully negotiates payment terms of up to 45 days with suppliers.

With these new figures, their CCC is recalculated:

CCC: 30 + 45 – 45 = 30 days

The result: significantly improved liquidity, reduced financial costs, and enhanced business operations.

Characteristics, Advantages, and Disadvantages of High and Low CCC

Now that we know what the Cash Conversion Cycle is, how it’s calculated, how to interpret it, and how to improve it through supply chain optimisation, it’s time to explore the differences between a high and a low CCC.

High Cash Conversion Cycle

As we’ve seen, a high CCC means longer conversion of inventory into cash and often requires external financing to cover liquidity needs. This is common in sectors with slow-moving goods or delayed customer payments.

Advantages:

• Ability to offer more flexible payment terms to customers.
• Greater inventory control in industries where storage isn’t costly.

Disadvantages:

• Higher working capital requirements.
• Risk of inventory obsolescence.
• Increased exposure to bad debts.

Low Cash Conversion Cycle

A low CCC means the time to convert investment into cash is shorter, thanks to more efficient operations. This is often seen in industries with fast product turnover.

Advantages:

• Reduced dependency on external funding.
• Improved cash flow.
• Agility to reinvest or scale operations.

Disadvantages:

• May strain supplier relationships if payment terms are extended too far.
• Less commercial flexibility with customers if quick payments are demanded.

Key Tips for Optimising Your CCC via the Supply Chain

To optimise a company’s CCC, improving supply chain management is essential. Here are three key areas to focus on:

• Reduce Inventory Days (DIO): Regularly review stock levels and use forecasting tools to align orders with actual demand.
• Improve Customer Turnover (DSO): Prioritise reliable clients, set clear payment terms, and actively follow up on outstanding invoices.
• Negotiate Better Supplier Terms (DPO): Extend payment deadlines where possible without damaging supplier relationships. A strategic negotiation is the foundation of an efficient supply chain.

How SCM Software Can Help Improve Your CCC

Using supply chain management (SCM) software allows better control of the metrics involved in the CCC. Key features include:

• Demand planning: Precisely align purchasing and production with real demand.
• Inventory planning: Prevent both stockouts and overstocking.
• Purchasing management: Control procurement cycles and optimise supplier terms.
• Customer and receivables analysis: Identify payment patterns and segment customers based on their impact on liquidity.

Centralising and automating these processes on one platform enables data-driven decision-making, shorter operational times, and stronger control over working capital.

CCC Across Different Industries

The Cash Conversion Cycle varies widely depending on the sector:

• Pharmaceutical: Longer CCC due to regulatory times, high safety stock, and slow payments from public institutions.
• Food: Short CCC; perishable goods and high turnover require quick, accurate management.
• Retail: Varies by product; fashion and electronics can have long CCCs if overstocked or heavily discounted.
• Automotive: Typically high CCC due to complex production and longer payment cycles from dealers.
• Chemical: Medium-to-high CCC due to high production costs and long inventory periods.
• Manufacturing: Variable CCC depending on vertical integration and logistics model.

Each industry has its own financial dynamics, so comparing CCCs within the same sector is the best way to assess efficiency.

Plan, Measure, and Optimise Your Cash Conversion Cycle

As we’ve seen, the Cash Conversion Cycle (CCC) is a KPI that links operational efficiency with a company’s financial health. Managing it properly means integrating areas like procurement, inventory, production, and receivables. That’s where specialised supply chain optimisation software can make a real difference.

If your goal is to boost liquidity, reduce costs, and better anticipate market demand, improving your CCC may be the first step. With advanced planning tools—like those we offer at Imperia—transforming your operations is easier than you think. If you’d like to know more about how we can help, don’t hesitate to contact our team.