How To Calculate Cash Conversion Cycle in Freshbooks | Arithmix

Calculating your cash conversion cycle is an important step in managing your business's cash flow. By understanding your cash conversion cycle, you can identify areas where you can improve your cash flow and make better decisions about managing your working capital. In this article, we'll explain what the cash conversion cycle is and when it's valuable to calculate it. We'll also provide a step-by-step guide on how to calculate your cash conversion cycle.

What Is Cash Conversion Cycle?

The cash conversion cycle (CCC) is a metric that measures the time it takes for a business to convert its investments in inventory and other resources into cash. In other words, it's the time it takes for a business to generate cash from its operations. The CCC is calculated by adding the number of days it takes to sell inventory, the number of days it takes to collect receivables, and subtracting the number of days it takes to pay suppliers.

The CCC is an important metric for businesses because it helps them understand how efficiently they are managing their working capital. A shorter CCC means that a business is generating cash more quickly, which can help improve its financial health and reduce the risk of cash flow problems.

When Is It Valuable To Calculate Cash Conversion Cycle?

It's valuable to calculate your CCC if you want to improve your cash flow and manage your working capital more effectively. By understanding your CCC, you can identify areas where you can improve your cash flow, such as reducing the time it takes to sell inventory or collect receivables. You can also use your CCC to compare your business's performance to industry benchmarks and identify areas where you can improve your efficiency.

Calculating your CCC is particularly valuable if you are experiencing cash flow problems or if you are planning to make significant investments in inventory or other resources. By understanding your CCC, you can make better decisions about how much inventory to purchase and when to purchase it, which can help you avoid cash flow problems and improve your financial health.

How To Calculate Cash Conversion Cycle

Calculating your CCC involves three steps:

1. Calculate the number of days it takes to sell inventory (Days Inventory Outstanding or DIO)
2. Calculate the number of days it takes to collect receivables (Days Sales Outstanding or DSO)
3. Calculate the number of days it takes to pay suppliers (Days Payable Outstanding or DPO)

Once you have calculated these three metrics, you can calculate your CCC using the following formula:

CCC = DIO + DSO - DPO

Let's take a closer look at each of these steps:

Step 1: Calculate Days Inventory Outstanding (DIO)

To calculate DIO, you need to know your average inventory and your cost of goods sold (COGS). You can calculate DIO using the following formula:

DIO = (Average Inventory / COGS) x 365

For example, if your average inventory is $10,000 and your COGS is $50,000, your DIO would be:

DIO = ($10,000 / $50,000) x 365 = 73 days

Step 2: Calculate Days Sales Outstanding (DSO)

To calculate DSO, you need to know your accounts receivable and your total sales. You can calculate DSO using the following formula:

DSO = (Accounts Receivable / Total Sales) x 365

For example, if your accounts receivable is $5,000 and your total sales are $100,000, your DSO would be:

DSO = ($5,000 / $100,000) x 365 = 18.25 days

Step 3: Calculate Days Payable Outstanding (DPO)

To calculate DPO, you need to know your accounts payable and your cost of goods sold (COGS). You can calculate DPO using the following formula:

DPO = (Accounts Payable / COGS) x 365

For example, if your accounts payable is $2,000 and your COGS is $50,000, your DPO would be:

DPO = ($2,000 / $50,000) x 365 = 14.6 days

Step 4: Calculate Cash Conversion Cycle (CCC)

Once you have calculated DIO, DSO, and DPO, you can calculate your CCC using the following formula:

CCC = DIO + DSO - DPO

For example, if your DIO is 73 days, your DSO is 18.25 days, and your DPO is 14.6 days, your CCC would be:

CCC = 73 + 18.25 - 14.6 = 76.65 days

Now that you know how to calculate your CCC, you can use this metric to identify areas where you can improve your cash flow and manage your working capital more effectively.

How Do You Calculate Cash Conversion Cycle in Freshbooks

Freshbooks itself isn’t naturally geared towards letting you calculate complex metrics like Cash Conversion Cycle. As an alternative, teams typically use products like Arithmix to import data from Freshbooks and build out dashboards.

What is Arithmix?

Arithmix is the next generation spreadsheet - a collaborative, web-based platform for working with numbers that’s powerful yet easy to use. With Arithmix you can import data from systems like Freshbooks, combine it with data from other systems, and create calculations like Cash Conversion Cycle.

In Arithmix, data is organized into Tables and referenced by name, not by cell location like a spreadsheet, simplifying calculation creation. Data and calculations can be shared with others and re-used like building blocks, vastly streamlining analysis, model building, and reporting in a highly scalable and easy to maintain platform. Data can be edited, categorized (by dimensions) and freely pivoted. Calculations are automatically copied across a dimension - eliminating copy and paste of formulas.

Arithmix is fully collaborative, giving your entire team access to your numbers and the ability to work together seamlessly.

Calculating Cash Conversion Cycle in Arithmix

Calculating metrics like Cash Conversion Cycle is simple in Arithmix. Once you've created your free account, you’ll be able to import your Freshbooks data, and use it to create natural language formulas for metrics like Cash Conversion Cycle.

Arithmix is designed to give you the power to build any calculations you want on top of your Freshbooks data, while also being easy to use and collaborate on. You can share your dashboards with users inside and outside of your organisation, making it easy to empower your whole team.