Ratio analysis
Efficiency and the cash conversion cycle
DSO, DIO, DPO and the cash conversion cycle: how many days cash is tied up in operations.
Learning objectives
- Calculate DSO, DIO and DPO on average balances
- Calculate the cash conversion cycle
- Explain how a lengthening cycle consumes cash
A retailer pays suppliers, holds the goods on its shelves, sells them, and — if customers buy on credit — waits to be paid. The cash conversion cycle (CCC) counts the days between paying for stock and collecting cash from the sale. Every extra day must be financed, so a longer cycle consumes cash even when profits are steady.
We express each working-capital balance in days of the flow that drives it: receivables in days of sales, inventory and payables in days of cost of goods sold.
DSO = avg Receivables ÷ Revenue × 365 DIO = avg Inventory ÷ COGS × 365 DPO = avg Payables ÷ COGS × 365 CCC = DSO + DIO − DPO
- DSO
- days sales outstanding — how long customers take to pay
- DIO
- days inventory outstanding — how long goods sit before sale
- DPO
- days payables outstanding — how long the company takes to pay suppliers
- avg
- (opening + closing balance) ÷ 2; some analysts use period-end — say which you use
Included with a Formula Quest membership
The rest of this lesson is for members. Members get the full lesson, including its 3 graded exercises, and every other Finance Quest lesson.