The cash conversion cycle measures how long cash stays tied up between paying suppliers and collecting from customers. See DSO, DIO and DPO, the working capital they represent, and how much cash each day of improvement releases.
How it works
Measure how many days cash is tied up between paying suppliers and collecting from customers, and how much cash each day of improvement would release.
DSO = A/R ÷ (Revenue ÷ Days)
DIO = Inventory ÷ (COGS ÷ Days)
DPO = A/P ÷ (COGS ÷ Days)
Cash conversion cycle = DSO + DIO − DPO
Operating working capital = A/R + Inventory − A/PCommon uses
- Working-capital improvement programs
- Cash-flow forecasting and liquidity planning
- Benchmarking collections, inventory and payables performance
Worked example
The calculator above opens with this example. Change any input to see the results update instantly, or select Reset to return to these figures.
| Revenue (period) | $48,000,000 |
| Cost of goods sold (period) | $31,000,000 |
| Accounts receivable | $6,200,000 |
| Inventory | $4,900,000 |
| Accounts payable | $3,600,000 |
| Days in period | 365 |
| Cash conversion cycle | 62.5 days |
| Days sales outstanding (DSO) | 47.1 days |
| Days inventory outstanding (DIO) | 57.7 days |
| Days payables outstanding (DPO) | 42.4 days |
| Operating working capital | $7,500,000 |
| Working capital % of revenue | 15.6% |
Each day of DSO reduction releases about $131,507; each day of DIO reduction or DPO extension releases about $84,932.
Interpreting the results
- Use average balances for the period when they differ materially from period-end balances.
- Compare the cycle against peers in the same industry; service businesses with no inventory can run negative cycles.
- Extending DPO beyond agreed terms can damage supplier relationships; focus first on collections and inventory.
Frequently asked questions
What is a good cash conversion cycle?
Shorter is better, but the right level depends on the industry. Retailers and subscription businesses can run negative cycles by collecting before paying suppliers, while manufacturers and distributors often run 60 days or more.
How is the cash conversion cycle calculated?
The cash conversion cycle equals days sales outstanding plus days inventory outstanding minus days payables outstanding. It is the number of days between paying for inventory and collecting cash from the customer.
Why are DIO and DPO based on cost of goods sold?
Inventory and payables are recorded at cost, so dividing them by daily cost of goods sold matches like with like. Receivables are recorded at selling price, so DSO uses revenue.
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