By Jordan Lau, Analyst
What is Cash Conversion?
The Cash Conversion Cycle (CCC) is the amount of time between a company spending cash on inventory and receiving cash for the sale of inventory. The lower the number is, the better it is for the company as this means it has taken the company a shorter amount of time to convert working capital into cash. CCC is an excellent measure of a company’s efficiency when it comes to operational cash management, and is calculated below.
Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO) = CCC
Amazon’s Conversion Machine
Amazon is one of the few companies who have a negative conversion cycle, meaning they are able to receive payment before paying their suppliers. Having a negative CCC allows Amazon to borrow from its suppliers to finance its operations, interest-free. This also frees up available cash that can be used for the company’s growth initiatives. Compared to other retail giants such as Walmart and Costco, Amazon have a significantly lower cash conversion cycle. So how have they been able to achieve this?