Cash Conversion Cycle Calculator (DIO + DSO - DPO)

The cash conversion cycle measures how long your money is someone else's -- the gap between paying suppliers and collecting from customers.

It is one of the few working capital measures that translates directly into cash. Every day of cycle is a day of revenue tied up, so a 75-day cycle on $5 million of revenue is roughly a million dollars that cannot be spent on anything else.

A negative cycle is possible and powerful. Supermarkets and many subscription businesses collect from customers before paying suppliers, which means growth generates cash rather than consuming it. That structural advantage is often worth more than a margin advantage.

• DIO, days inventory outstanding: average inventory ÷ cost of goods sold × 365
• DSO, days sales outstanding: average receivables ÷ revenue × 365
• DPO, days payables outstanding: average payables ÷ cost of goods sold × 365

The operating cycle is DIO + DSO: how long from buying stock to collecting cash, ignoring supplier credit. Subtracting DPO gives the portion you actually have to fund yourself.

Cash tied up is the cycle in days multiplied by daily revenue.

DIO 60, DSO 45, DPO 30, revenue $5,000,000:

• Operating cycle: 60 + 45 = 105 days
• Suppliers fund 30 of those days
• Cash conversion cycle: 75 days
• Daily revenue: $13,698.63
• Cash tied up: $1,027,397.26
• Each ten-day improvement releases $136,986.30

A retail model (DIO 20, DSO 2, DPO 60): the cycle is −38 days. Customers pay at the till while suppliers wait two months, so roughly $520,548 of supplier money funds the business permanently.

Customers taking 90 days instead of 45: the cycle stretches to 120 days, adding some $616,000 to the cash requirement without a single extra sale.

Halving inventory to 30 days: the cycle falls to 45 days. Inventory is usually the largest and most controllable component.

• Seasonality. Year-end balance sheet figures can badly misrepresent a seasonal business. Averages across the year are better where available.
• Which denominator to use. DPO and DIO are conventionally computed on cost of goods sold and DSO on revenue. Using revenue throughout is common but not comparable across companies.
• The cost of stretching DPO. Lengthening supplier terms shortens the cycle on paper while forfeiting early payment discounts and straining relationships. A 2/10 net 30 discount forgone is an expensive form of financing.
• Bad debt. DSO measures how long customers take to pay, not whether they pay.
• Inventory obsolescence. Low DIO achieved by writing stock off is not an improvement.
• Financing cost. This shows the cash locked up, not what it costs to fund. Multiply by your borrowing rate for that.
• Service businesses, which carry no inventory, so DIO is zero and the cycle is DSO less DPO.
• Contract assets and deferred revenue, which sit outside the three classic components.

• Improving the cycle only by stretching suppliers. It works arithmetically and can be expensive commercially. Forfeiting a 2% discount for 20 days of extra credit is an annualised cost well above most borrowing rates.
• Using year-end balances for a seasonal business. A December stocktake at a toy company tells you very little about the average.
• Mixing denominators. Comparing your DSO on revenue with a competitor's on cost of goods sold produces a meaningless gap.
• Treating a negative cycle as free money. It is supplier and customer financing, and it reverses instantly if the business shrinks. Negative-cycle businesses are exposed on the way down.
• Ignoring bad debt when celebrating low DSO. Collections speed and collections quality are different things.
• Assuming shorter is always better. Cutting inventory too far causes stockouts, and tightening customer terms can cost sales.

• Standard working capital analysis. DIO, DSO, DPO and the cash conversion cycle are conventional accounting ratios with no jurisdictional content.
• The convention of computing DIO and DPO on cost of goods sold and DSO on revenue is noted, since mixing denominators is a common comparability error.