What is Cash Conversion Cycle?
The Cash Conversion Cycle measures how long cash is tied up in operations. It combines three metrics: how long you hold inventory (DIO), how long customers take to pay (DSO), and how long you take to pay suppliers (DPO). Lower or negative CCC is better.
Why CCC Matters for Founders
CCC reveals your working capital efficiency. A 60-day CCC means you need to finance 60 days of operations before cash comes back. A negative CCC, like Amazon achieves, means you collect from customers before paying suppliers, essentially running on vendor financing.
For ecommerce founders, CCC determines how much working capital you need to scale. A high CCC means every dollar of growth requires proportionally more cash investment.
The Power of Negative CCC
Businesses with negative CCC can grow almost indefinitely without external capital because growth generates cash rather than consuming it. This is a massive competitive advantage.
Cash Conversion Cycle = DIO + DSO - DPO
DIO = Days Inventory Outstanding
DSO = Days Sales Outstanding
DPO = Days Payable Outstanding
Your ecommerce company has:
- DIO: 45 days (inventory holding time)
- DSO: 30 days (customer collection time)
- DPO: 60 days (supplier payment time)
CCC = 45 + 30 - 60 = 15 days
Cash is tied up for only 15 days per cycle. If you could negotiate DPO to 75 days, you would hit zero CCC and need minimal working capital to grow.