Profits may look great on paper, but it's cash that keeps the business running. Most companies don't close down due to a lack of profit. They fail because they can’t pay bills on time. Often, cash simply gets stuck in operations. You pay for inventory and handle supplier invoices while waiting for customers to pay.
That gap is your cash conversion cycle (CCC). It dictates how much working capital you need to operate effectively.
If you own the financial model, CCC is a lever you need to pull. It measures how long capital remains locked between paying suppliers and collecting revenue. Shorten the cycle, and you increase liquidity immediately. Ignore it, and you might drain reserves before the problem hits your P&L.
This guide breaks down the mechanics of the cash conversion cycle. You'll learn:
- how to calculate CCC accurately
- why it drives liquidity
- key methods to adjust your strategy
- how to track it all in Runway for better cross-team planning
Understanding the Cash Conversion Cycle (CCC)
The cash conversion cycle counts how many days it takes to turn cash spent on inventory and operations into cash back from customers. It’s a measure of working capital efficiency. You’re timing three things:
- how long inventory sits unsold
- how long customers take to pay
- how long you can wait to pay suppliers
You can think of it like a stopwatch. It starts when you pay for inventory or production and stops when a customer pays you. The longer it runs, the more cash you need for daily work. If the cycle is short, less cash is tied up. You get more liquidity and less risk of needing outside financing.
More formally, the CCC comes from three parts:
- Days inventory outstanding (DIO): days inventory sits before you sell it
- Days sales outstanding (DSO): days it takes to collect cash after a sale
- Days payable outstanding (DPO): days you take to pay suppliers
These numbers tell you how long cash is tied up in your daily work. Move inventory faster, collect faster, and pay suppliers a bit later, you need less working capital.
Why CCC matters and how it drives financial strategy
The CCC sits at the center of smart working capital management. It tells you how much cash you need for growth, how long you have before you need more capital, and how well your team turns spending into real revenue.
Here’s how CCC impacts the rest of your business:
- Working capital and liquidity planning: CCC tells you how much cash your operating cycle needs. Say your CCC is 60 days and you’re running $1 million in monthly COGS and revenue. You need about $2 million in working capital to keep moving.
- Cash flow forecasting and burn rate: CCC has a direct link to cash flow. Your P&L might show strong revenue, but if DSO is 45 days, that cash won’t arrive for six weeks. If DPO is only 30 days, you pay suppliers first. The gap increases your burn and shortens your runway faster.
- Runway estimation: CCC is core when you’re projecting how long your cash will last. Growth can make working capital needs balloon. Even if the P&L shows profits, fast growth eats cash when receivables and inventory leap ahead of payables. Longer collection times or too much inventory drags on cash reserves.
- Vendor and customer payment terms: CCC spotlights your options. If DPO is short, negotiate longer vendor terms. If DSO is high, tighten your billing or offer quick-pay discounts. Each day shaved off adds real cash back.
- Financing for growth: Investors check CCC in due diligence. If it’s negative (collecting from customers before paying suppliers), your company can often fund growth with working capital float. If CCC is long, scaling needs more funding from outside.
- Operating efficiency: CCC can be a true reality check. Slow-moving inventory, delayed collections, quick supplier payments. These all show where you can improve and free up cash.
Unpacking the CCC formula and methods
There’s more than one way to calculate and analyze your cash conversion cycle. The right method depends on your business model, your data, and what you want to measure.
Standard formula
The usual formula goes like this:
CCC = DIO + DSO - DPO
Where:
- DIO (days inventory outstanding):
(average inventory / COGS) × days in period - DSO (days sales outstanding):
(average accounts receivable / net revenue) × days in period - DPO (days payable outstanding):
(average accounts payable / COGS) × days in period
You get a single number showing the net days from paying out cash to bringing it back in. If DIO is 45 days, DSO is 30 days, and DPO is 60 days, CCC lands at 15 days. You’re cycling cash in about two weeks after you factor in all the timing.
Component-level focus
Many teams analyze individual parts of the CCC rather than just the aggregate number. This breakdown reveals which lever moves your cycle.
Metric Variance = Current Period Metric - Previous Period Metric
If your CCC jumps from 20 days to 35 days over a quarter, and DSO rises from 30 to 45 days while other metrics stay flat, you know collections require attention. This allows you to focus efforts where they count, such as billing, payment terms, or collection follow-ups.
Weighted-average method
If you have different product lines or customer groups with their own cycle timings, average them by weight for a clearer view.
Say your enterprise customers pay in 60 days but SMBs pay in 15. If you just calculate the blended DSO, you’ll miss what’s really happening. Instead, run the math for each group and weight by revenue or COGS.
Weighted Average = (Segment A Metric × Segment A Weight) + (Segment B Metric × Segment B Weight)
Use this approach for companies with diverse product lines or global markets that face big timing differences.
Rolling-period calculation
Seasonal spikes and one-off events can skew a single month or quarter. Using a rolling average over three or six months evens things out.
Rolling Average = (Sum of Metric over n Periods) / n
If you work in retail, your Q4 inventory might spike while November receivables sit. December might look off if you check the month in isolation. A rolling three-month calculation provides a true picture of your cycle.
Cash-to-cash waterfall method
This method tracks the actual journey from the moment cash goes out for materials to when it comes in after a sale. You view each stage rather than just the averages.
Cash-to-Cash Duration = Date of Cash Inflow - Date of Cash Outflow
For example:
- Day 0: Pay for raw materials
- Day 15: Materials arrive and go into production
- Day 30: Finished goods ready for sale
- Day 45: Product ships out
- Day 75: Customer pays invoice
Here, the true cash-to-cash duration is 75 days. This works well for manufacturers or teams with longer supply chains who need granular tracking.
Key components and practical considerations
Calculate every part of your CCC with clarity. Use data that matches how your business actually runs.
Picking the right revenue and COGS figures
Always use net revenue for DSO, not gross. Net cuts out returns, allowances, discounts, and simplifies your DSO. Use the same definition of COGS across both DIO and DPO, so every metric lines up.
Calculating DIO
DIO tells you the average number of days it takes to sell your current inventory.
DIO = (average inventory / COGS) × number of days in period
Average inventory smooths out the numbers. Calculate it by dividing your beginning plus ending inventory by two. If your business has big inventory swings, try a daily weighted average.
Include raw materials, work-in-progress, and finished goods. Count items in transit or consignment too. Excluding them makes your DIO look better than it really is.
Watch out for seasonality. Compare Q4 to Q4 of the previous year or check rolling averages. This prevents misleading spikes in your data.
Calculating DSO
DSO measures how many days it takes to get paid after a sale.
DSO = (average accounts receivable / net revenue) × number of days in period
Focus on credit sales. Leave out instant cash sales since they don’t affect DSO. Including them hides slow collection issues.
Your AR balance might not align with recognized revenue if you use milestones or complex billing. Break down DSO by customer type or contract for a clearer view.
Deferred revenue changes working capital for subscription businesses. When customers prepay for a year, you collect cash upfront and recognize revenue monthly. This creates a negative DSO and shortens your CCC.
Calculating DPO
DPO = (average accounts payable / COGS) × number of days in period
Count only trade payables. This is what you owe suppliers for inventory and production.
Keep payroll, taxes, and other liabilities out of the mix. Including them inflates DPO and distorts your CCC. Use average AP to smooth out odd jumps from big payments near the close.
Measuring periods
Monthly, quarterly, or TTM (trailing twelve months) all have their uses. Monthly gives fast feedback but can be noisy. Quarterly evens it out, but may still miss big changes. TTM is steady but reacts slowly.
For most finance teams, set your cycle to match your board or management cadence. Add a three-month or six-month view if the business has pronounced seasonality.
Adjusting for seasonality
If your inventory, revenue, or payment terms change by season, always compare year-on-year or use rolling averages. You’ll spot true trends, not just noisy data.
Handling prepaid expenses and deposits
Prepaid expenses and deposits are real outflows. They often don’t show in AP but impact your cash cycle. If you prepay rent, insurance, or give vendors a deposit, factor that cash into your working capital analysis. The usual CCC formula won’t capture these, so keep an eye on them.
Deferred revenue and customer deposits
If customers pay upfront you get cash in before recognizing revenue. This shortens or can even flip your CCC negative. Make sure you don’t count deferred revenue in AR, or adjust for cash collection timing.
Returns, allowances, and credit memos
Returns and credits lower your real receivables. Use net AR and net revenue to get true DSO.
CCC for SaaS and subscription businesses
No physical inventory? No problem. SaaS companies focus on DSO (cash collection timing) and DPO (vendor payment timing). You can track “days to cash” from contract sign to cash paid, capturing your sales cycle and billing patterns.
CCC benchmarks and industry norms
CCC ranges by industry and business model. Here’s how it stacks up:
- Software and SaaS: Often negative CCC. Customers pay upfront, inventory is light. Typical: -30 to -90 days. You’re funding operations with working capital float.
- E-commerce and consumer products: Usually 30 to 80 days, depending on inventory turns and payment speed. Fast consumer goods with quick turnover are low; slower-moving products higher up.
- Manufacturing: 60 to 120+ days is common. Production cycles, raw material buys, and complex assembly all make this longer.
- Negative vs. positive CCC: Negative means you get cash from customers before paying suppliers. That’s powerful. Positive means you’re filling the gap with your own cash or financing.
- Component-level wins: Best teams tune each lever. Cutting DSO by five to ten days can release a lot of cash. Extending DPO helps, but keep it fair, going past 60 to 90 days may strain vendor ties.
- High growth and CCC: Faster growth can make CCC jump as receivables expand ahead of payables. Each day’s improvement can unlock thousands or millions of dollars, depending on your volume.
Track CCC every month or quarter. Benchmark against peers and your own history. Focus less on the absolute number, and more on direction and what’s driving the changes.
Avoiding common pitfalls in managing CCC
CCC looks simple on paper, but small errors skew the results. Here is how to keep your analysis accurate and useful.
- Keep time periods consistent. Calculate DIO, DSO, and DPO on the exact same cycle so you can always compare apples to apples.
- Smooth out noise with averages. Use average balances rather than period-end snapshots to account for daily volatility.
- Define inputs precisely. Count inventory in transit since it locks up cash, but restrict DPO calculations to trade payables only.
- Verify against the bank balance. An improved metric creates more available cash, so ensure your calculation reconciles with reality.
- Segment data to find the truth. Averages hide details, so break numbers down by customer or product to spot real collection patterns.
Tracking cash conversion cycle in Runway
Runway lets finance and operations teams track CCC without stress. Your calculations stay connected to real data, so you can check performance, model possibilities, and share update.
Step 1: connect your accounting system
Connect Runway to your accounting platform, such as QuickBooks, Xero, NetSuite. This syncs key numbers automatically: revenue, COGS, AR, inventory, AP.
Step 2: identify your data sources
In Runway, your data lives in connected databases. Find the right ones for:
- revenue (income statement)
- COGS (income statement)
- accounts receivable (balance sheet)
- inventory (balance sheet)
- accounts payable (balance sheet)
Apply filters as needed, like excluding non-trade receivables or bringing in only trade payables.
Step 3: build your component drivers
Create a driver for each: DIO, DSO, DPO. Each should include:
- beginning and ending balances
- average balance:
(beginning + ending)/2 - revenue or COGS per day
- days outstanding (average balance divided by daily revenue or COGS, times days in period)
Your DSO driver, for example, might use:
- beginning AR: pulled for start of month
- ending AR: end of month
- average AR:
(beginning + ending) / 2 - net revenue: only credit sales
- revenue per day: net revenue / days
- DSO:
(average AR / revenue per day) × days
Use ifError to guard against divide-by-zero in a zero-revenue month.
Step 4: calculate CCC
Set up a CCC driver to combine the three components:
CCC = DIO + DSO - DPO
Reference the DIO, DSO, and DPO drivers. Runway will keep it up to date as new data syncs every month.
Step 5: split actuals and forecasts
With Runway’s lastClose(), split actuals and forecast numbers cleanly. Actuals pull straight from synced data to the last close. Beyond that, use projected improvements such as better DSO or stronger inventory turns.
Now you can model changes: "what if we cut DSO by 10 days?" or "what if DPO moves to 60 days?", and see the real cash impact in seconds.
Step 6: segment by product, customer, or region
Use Runway’s modeling to break CCC out by product, customer, or geography to handle multiple segments. Shared dimensions let you view the same formulas across every important slice.
This shows you which customers or products move the cycle over time. You get clear insights without building new models from scratch.
Step 7: rolling-period and weighted-average views
Add trailing 3-month or 6-month calculations to deal with seasonality. Runway’s date tools make this quick.
For weighted-average CCC, multiply each group’s CCC by its size, add together, then divide by total. You get a blended view, but also see drivers by segment.
Step 8: create scenarios
Runway scenarios let you see the impact of changes fast. Try:
- cutting DSO by five, ten, or fifteen days
- extending DPO with better vendor terms
- improving inventory turns to bring down DIO
Each tweak updates CCC, working capital, and cash flow at once. You can see the difference in runway and build a plan.
Step 9: share insights with pages
Create a Runway page with CCC trends, a breakdown of components, and scenario comparisons. Share it with your peers, execs, or investors. Everyone stays aligned on what’s changing and why.
Pages help you tell the story, not just show numbers. You can explain why CCC improved, who drove the win, and what it means for your cash and next steps.
Step 10: automate and audit
With your CCC model live, Runway updates it with every sync. Drill into any formula to check logic and filters. Auditing and presenting to stakeholders is easy and transparent.
No more chasing down data or rebuilding every month. You get real-time working capital insights and control.
Put your CCC strategy to work
The cash conversion cycle operates as an actionable tool. It highlights where cash bottlenecks form, identifies the levers you can pull, and clarifies how much working capital you need for each stage of growth.
Every day you cut from the cycle represents extra cash for reinvestment. Your runway grows. You gain flexibility, and financing becomes easier to manage. Small wins in DSO, DIO, or DPO free up real money, and that impact scales along with your business.
Runway helps you monitor CCC in real time, test scenarios, and share knowledge across your team. Sync your data, build your model once, and let it update automatically. You don't need broken spreadsheets or guesswork to understand how working capital shifts will impact your cash tomorrow.
Ready to take control of your cash conversion cycle? Try Runway and see how you can forecast better, plan smarter, and lead your team with confidence.