Cash Conversion Cycle (CCC)

The formula

CCC = DIO + DSO − DPO, where DIO is Days Inventory Outstanding (how long inventory sits before it's sold), DSO is Days Sales Outstanding (how long it takes to collect after a sale), and DPO is Days Payable Outstanding (how long you take to pay suppliers).

A 60-day CCC means each dollar invested in inventory or work-in-progress takes 60 days to come back as collected cash. Halving the CCC effectively doubles the amount of revenue your working capital can support.

What changes the CCC

Service businesses with no physical inventory still have an analogous metric: work-in-progress (hours billed but not yet invoiced) plus DSO, minus payment terms with subcontractors and software vendors. Tightening the gap between work delivered and work invoiced often does more for cash than chasing collections.

Famously, Dell ran negative CCC in the 1990s — collecting from credit-card customers in days while paying suppliers in 30-60 days. For most service businesses, getting CCC under 30 days is excellent; under 15 is exceptional and usually requires deposits or upfront payment.

Reducing it in practice

The fastest CCC reductions usually come from receivables, not payables. Switching from net-30 to deposit + net-15 can take 30 days out of DSO almost immediately, while squeezing suppliers on DPO requires negotiating leverage you may not have and risks damaging relationships. Tightening the gap between work delivered and work invoiced — billing weekly instead of monthly, or upon milestone instead of on completion — is a free and underused lever.

Inventory or WIP is the second lever. For service businesses, WIP is hours billed but not yet invoiced; it accumulates whenever there's a delay between delivery and billing. Many agencies discover that they're carrying 30-60 days of WIP just because their billing process is monthly batched. Moving to a weekly billing rhythm with automated draft invoices can release a meaningful chunk of cash without changing a single contract.

Track CCC monthly and benchmark it against your industry. CFO Magazine's annual working capital surveys publish median CCC by sector — typically 30-60 days for professional services, 60-90 for general contractors, 90+ for manufacturing. If your CCC is materially worse than the median, working capital is the highest-ROI place to invest finance team attention.

A useful CCR variant for service businesses substitutes work-in-progress days for inventory days: WIP days + DSO − DPO. The metric captures the same underlying dynamic — how long cash is tied up between paying labor and collecting from customers — and is much more relevant to firms that don't carry physical inventory. Most ERP and accounting platforms can compute it with a small custom report.