Cash Conversion Cycle and EBITDA – Turning Profits into Cash
Introduction
A company can post strong EBITDA numbers and still run into cash shortages. The reason often lies in the Cash Conversion Cycle (CCC)—the measure of how quickly a business converts its investments in inventory and receivables into actual cash.
This paper explains the link between EBITDA and the CCC, and why understanding both is essential for sustaining healthy liquidity.
What is the Cash Conversion Cycle?
The CCC tracks the time between cash leaving your business (to pay suppliers) and cash returning (from customer payments).
Formula: CCC = DIO + DSO – DPO
• DIO (Days Inventory Outstanding): Average days to sell inventory.
• DSO (Days Sales Outstanding): Average days to collect from customers.
• DPO (Days Payable Outstanding): Average days to pay suppliers.
Why CCC Matters Even if EBITDA Looks Strong
• EBITDA shows profits, not liquidity. You may look profitable on paper but be starved of cash if receivables pile up.
• Slow collections eat into liquidity. A high DSO drains working capital.
• Excess inventory ties up capital. A high DIO means profits are locked in unsold goods.
• Short supplier terms reduce flexibility. A low DPO can mean cash goes out before it comes in.
Examples
• Company A: $5M EBITDA but a 180-day CCC → constantly borrowing to cover payroll.
• Company B: $2M EBITDA but a 45-day CCC → stronger liquidity, lower debt needs, higher valuation.
How to Improve Your CCC
• Tighten credit policies and incentivize early customer payments.
• Improve inventory management to reduce DIO.
• Negotiate longer supplier terms to extend DPO.
• Use automation (billing systems, AR/AP software) to accelerate cycle times.
Takeaway
EBITDA reflects profitability, but the CCC reflects cash reality. Business owners who manage both effectively can grow sustainably, avoid liquidity crunches, and build stronger enterprise value.
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