Questions:
How is the cash conversion cycle calculated? What does it measure?

|                |   2023   |   2022   |
|----------------|-------------|-------------|
| Sales          | $450,354.00  | $850,105.00 |
| Cost of Sales  | $315,247.80  | $595,073.50 |
| Receivables    | $22,517.70   | $42,505.25  |
| Inventory      | $27,021.24   | $51,006.30  |
| Payables       | $13,510.62   | $25,503.15 |

What is the cash conversion cycle in the year 2023?

Reference answers:
The cash conversion cycle (CCC) also called the net operating cycle or cash cycle, is a metric that expresses, in days, how long it takes a company to convert the cash spent on inventory back into cash from selling its product or service. The shorter the cash cycle the better, as it indicates less time that cash is bound in accounts receivable or inventory. The cash conversion cycle encompasses three key stages of a company’s sales activity:
• Selling current inventory
• Collecting cash from current sales
• Paying vendors for goods and services purchased
Formula for CCC = DIO + DSO – DPO

Where:
DIO = Days Inventory Outstanding (average inventory/cost of goods sold x number of days)
DSO = Days Sales Outstanding (accounts receivable x number of days/total credit sales)
DPO = Days Payable Outstanding (accounts payable x number of days/cost of goods sold)

The cash conversion cycle attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.
This metric considers how much time the company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills.
• The cash conversion cycle (CCC) is a metric that expresses the length of time (in days) that it takes for a company to convert its investments in inventory and other resources into cash flows from sales.
• This metric takes into account the time needed for the company to sell its inventory, the time required for the company to collect receivables, and the time that the company is allowed to pay its bills without incurring any penalties.
• CCC will differ by industry sector based on the nature of business operations.
CCC is one of several quantitative measures that help evaluate the efficiency of a company’s operations and management. A trend of decreasing or steady CCC values over multiple periods is a good sign while rising ones should lead to more investigation and analysis based on other factors.

The cash conversion cycle (CCC) is a measure of management effectiveness. It measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash, or the capital investment as it is first converted into inventory and accounts payable through sales and accounts receivable and then back into cash. The lower the number for the CCC, the better it is for the company.

The Cash Conversion Cycle is defined as: 

CCC = Days Inventory in Hand + Days Receivables Outstanding - Days Payables Outstanding)

Where:
Receivables Turnover = Sales / Average Receivables
Inventory Turnover = Cost of Sales / Average Inventory
Days Inventory in Hand = 365 / Inventory Turnover
Days Receivables Outstanding = 365 / Receivables Turnover
Payables Turnover = Purchases / Average Payables
Days Payables Outstanding = 365 / Payables Turnover

Let's walk through each of these calculations step-by-step. First, lets create a table with some averages.

|                                                           |   2023   |   2022   |   Average   |
|-----------------------------------------------------------|-------------|-------------|-------------|
| Sales                                                     | $450,354.00 | $850,105.00 |             |
| Cost of Sales                                             | $315,247.80 | $595,073.50 |             |
| Receivables                                               | $22,517.70  | $42,505.25  | $32,511.48  |
| Inventory                                                 | $27,021.24  | $51,006.30  | $39,013.77  |
| Payables                                                  | $13,510.62  | $25,503.15  | $19,506.89  |

1. Purchases in 2023

Purchases in 2023 = (Cost of Sales in 2023 - Opening Inventory in 2023 + Closing Inventory in 2023)

Purchases in 2023 = ($315,247.80 - $51,006.30  + $27,021.24) = $291262.74

2. Inventory Turnover (Cost of Sales / Average Inventory)

Inventory turnover = $315.247.80 / $39,013.77  = 8.08

3. Days Inventory in Hand (365 / Inventory Turnover)

Days inventory on hand = 365 / 8.08 = 45.17 days

3. Receivables Turnover (Sales / Average Receivables)

Receivables turnover = $450,354 / $32,511.48 = 13.85

4. Days Receivables Outstanding (365 / Receivables Turnover)

Days receivables outstanding = 365 / 13.85 = 26.35 days 

5. Payables Turnover (Purchases / Average Payables)

Payables turnover = $291262.74 / $19,506.89 = 14.93

6. Days Payables Outstanding (365 / Payables Turnover)

Days payables outstanding = 365 / 15.55 = 24.45 days

7. Cash Conversion Cycle (Days Inventory in Hand + Days Receivables Outstanding - Days Payables Outstanding)

Cash conversion cycle = 45.17 days + 26.35 days - 24.45 days = 47.08 days

The Cash Conversion Cycle in 2023 is 47.08 days.