Explanation

The cash conversion cycle (CCC) is calculated as:

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payables Outstanding (DPO)

Where:

• DIO = Days Inventory Outstanding = 365 / Inventory Turnover
• DSO = Days Sales Outstanding = 365 / Receivables Turnover
• DPO = Days Payables Outstanding = 365 / Payables Turnover

Given that the receivables turnover ratio equals the payables turnover ratio:

• Receivables Turnover = Payables Turnover
• Therefore, DSO = DPO (since both use the same denominator of 365)

Substituting into the CCC formula: CCC = DIO + DSO - DPO CCC = DIO + DSO - DSO (since DSO = DPO) CCC = DIO

Thus, the cash conversion cycle equals the number of days of inventory on hand.

Key Points:

• When receivables turnover equals payables turnover, DSO equals DPO
• The DSO and DPO terms cancel out in the CCC formula
• The remaining component is DIO (Days Inventory Outstanding)
• Therefore, CCC = DIO = number of days of inventory on hand