What is Cash Conversion Cycle: Definition & Meaning Explained

Definition of Cash Conversion Cycle

A Cash Conversion Cycle (CCC) tells you how many days it will take to convert a company’s inventory or resources into cash. The formula for Cash Conversion Cycle is:

Cash Conversion Cycle = (DIO + DSO) – DPO

DIO: Days Inventory Outstanding is the average number of days it takes for a company to turn inventory into cash through sales
DSO: Days Sales Outstanding is the average number of days it takes for a company to collect its receivables
DPO: Days Payable Outstanding is the average number of days it takes fo a company to fulfil its obligations or payables

Holding Period

The holding period of a financial security is the time period between buying and selling the said security. It is the total amount of time for which the security has been held in the portfolio of an investor. At times, there’s a mandatory holding period attached to a security. During this mandatory holding period, the security can not be sold.

Forex Options

Forex options are exchange-traded derivative contracts that give the right but not the obligation to buy or sell a pair of underlying currencies at a pre-agreed price and date. Forex options are also known as currency options.

Every forex option can be split into a call or put option. A forex call option gives the holder the right to buy underlying forex pairs while a forex put option gives the holder the right to sell underlying currency pairs.

In either case, there is no obligation to exercise the contract but there is a pre-agreed price and expiration date attached. In India, forex options are only available for the USD-INR currency pair.

Follow On Public Offer

A Follow On Public Offer or FPO allows a publicly traded company to issue more stock to public investors. FPOs are similar to IPOs because FPOs allow companies to raise additional capital through the public market.

For an FPO to be possible, a company must have already done an IPO. FPO shares are typically issued at a discount by a company whose track record is already clear because they are publicly traded.

Founders Stock

The term founders stock refers to shares issued to the founders of a company. This type of stock is issued at face value and carries a vesting period, which is a lock-in period during which the shares cannot be sold.

During this period, the founders stock may not earn any returns, unless there are dividends attached to it. Founders stock is not an accounting term - it is used colloquially to denote the shares issued to founders.

Derivatives Trading

Derivatives trading means buying and selling derivatives contracts like futures, options, swaps, and forwards either on an exchange or over the counter.

Trading derivatives means trading contracts that derive their value from an underlying asset like stocks, commodities, currencies, indexes, interest rates, and more.

The buyer of the contract can decide to take delivery to the underlying asset or offset it with an opposite contract.

Cash Conversion Cycle