The Formula That Explains Everything

The cash conversion cycle formula looks complicated. It's not. Let me break it down in 60 seconds. CCC equals DIO plus DRO minus DPO. 3 numbers, that's it. DIO is days inventory outstanding, how long your inventory sits in warehouse before someone buys it. The formula: average inventory divided by cost of goods sold times 365. If your inventory sits for 90 days on average, your DIO is 90. That's 90 days of trapped cash right there. DRO is days receivables outstanding, how long until customers pay you after they order. For DTC, this is usually 3 to 5 days because credit cards settle fast. For wholesale, 30 to 60 days. DPO is days payable outstanding, how long your suppliers give you before you have to pay. This one works in your favor. The longer your payment terms, the lower your CCC. Net 30 is better than net 15. Net 60 is even better. Extra day your supplier gives you is a your cash stays in your bank account instead of theirs. Lower CCC equals faster cash return. Tomorrow I'm showing you what happens when this number gets out of control. Follow for more.