CCC is an acronym for cash collection cycle. In other words, it’s the amount of time it takes to turn inventory into cash. When evaluating a business, the CCC is a very good trend to track. Just as in golf, the lower the number, the better.
The formula to track the CCC is:
Days sales outstanding
Plus days inventory outstanding
Less days accounts payable outstanding
A company that has a high CCC has less cash available to pay its shareholders and to make investments. It may also need to borrow additional funds to provide for its working capital needs. If the CCC is trending higher each year, it could be a signal to management that:
- Customers aren’t paying as timely. Customers may be unhappy with the product or service or getting better payment terms, the company may be getting lax in collecting their money, or a variety of other reasons.
- Vendors are getting paid quicker. Vendors may have been stretched too far and are now demanding quicker repayment terms, or accounts payable may be issuing payment faster.
- Inventory is building. A high CCC may be a sign of obsolete inventory. Remember, days inventory is an average. We typically find many items that turn very quickly and others that turn very slowly. If the numbers are large enough, a good purchasing manager may be in order. In service companies, unbilled accounts receivable is just like inventory. Is there a billing issue? Are invoices not going out timely? Is there obsolete inventory that needs to be liquidated?
To see a real-life example of how the CCC can be useful in evaluating a business, check out this article about Cabela’s from the Motley Fool.
Do you currently track the CCC? Any insight you can offer? Share in the comments.