BALANCECHEAT / FIELD NOTES

Cash conversion cycle: DSO + DIO − DPO

How many days does operating cash stay tied up? The cash conversion cycle follows money through customers, inventory and suppliers.

The cash conversion cycle formula

CCC = DSO + DIO − DPO

The cash conversion cycle estimates the time between paying for goods and collecting the cash from their sale. It combines the collection period with inventory holding time and subtracts the credit supplied by vendors.

Three components

DSO — days sales outstanding: average accounts receivable ÷ annual credit revenue × 365. It approximates customer collection time.
DIO — days inventory outstanding: average inventory ÷ annual cost of goods sold × 365. It measures inventory holding time.
DPO — days payable outstanding: average accounts payable ÷ annual cost of goods sold × 365. It approximates supplier payment time. Purchases can be a better denominator when available.

For annual forward modeling, BalanceCheat applies these day assumptions to revenue and costs to derive closing balances. Its displayed CCC uses those closing balances, including transaction adjustments. This differs from the average-balance approach often used to analyze reported financials.

A worked example

A company collects in 45 days, holds inventory for 60 days and pays suppliers in 35 days. CCC = 45 + 60 − 35 = 70 days. Reducing DSO to 30 days shortens the cycle to 55 days, without changing operating profit.

What a shorter cycle means

A shorter cycle generally ties up less cash in operating working capital. A negative cycle is possible when customers pay before suppliers must be paid. This can be normal for some retailers; it is not inherently an error.

Use the metric carefully

Seasonality, acquisitions, sales taxes and a mix of cash and credit sales can distort the ratios. Very low inventory or zero cost of sales makes some day metrics unhelpful. A longer DPO can improve short-term cash but may reflect payment stress or harm supplier terms.

Compare similar businesses over time. Try the DSO slider in the financial model and follow its effect on CFO and free cash flow.