Cash Conversion Cycle
Investment Banking glossary · Investment Banking Valuation
Definition
CCC = DSO + DIO - DPO — the number of days between paying suppliers (cash out) and collecting from customers (cash in). A shorter CCC signals more efficient working capital management and frees up cash; a negative CCC (Amazon, subscription businesses with deferred revenue) means the company is effectively financed by its suppliers and customers.
Cash Conversion Cycle in plain English
The Cash Conversion Cycle measures how many days a company's cash is stuck in limbo — money it has already spent on inventory but hasn't yet gotten back from customers. You add the days it takes to sell your stuff (DIO) plus the days customers take to actually pay you (DSO), then subtract the days you get to delay paying your own suppliers (DPO), since that's a stretch where you're using their money for free. A shorter cycle is better because your cash isn't trapped — you can reinvest it faster. Amazon famously runs a NEGATIVE cycle: customers pay instantly while Amazon pays suppliers weeks later, so it's essentially running on other people's money, like a lemonade stand that collects cash up front but doesn't pay for lemons until next month.
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