The Cash Conversion Cycle: DIO + DSO − DPO and How Long Your Cash Is Tied Up
October 29, 2026
The cash conversion cycle (CCC) measures how many days a company's cash is tied up between paying for inventory and collecting from customers. It combines three metrics: days inventory outstanding (DIO), days sales outstanding (DSO), and days payables outstanding (DPO). CCC = DIO + DSO − DPO. A company that holds inventory for 60 days, collects from customers in 45 days, and pays suppliers in 30 days has a CCC of 60 + 45 − 30 = 75 days.
The shorter the cycle, the less working capital the business needs. A negative CCC, as with some retailers who sell goods before paying suppliers, means that suppliers effectively finance the business.
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DIO = average inventory ÷ cost of goods sold × 365: how long inventory sits before being sold. DSO = accounts receivable ÷ revenue × 365: how long customers take to pay. DPO = accounts payable ÷ cost of goods sold × 365: how long the company takes to pay its suppliers. Consider a company with annual COGS of $3.65 million ($10,000 a day), revenue of $5.0 million, inventory of $600,000, receivables of $616,000, and payables of $300,000. DIO = 60 days, DSO = 616,000 ÷ 5,000,000 × 365 = 45 days, DPO = 30 days. CCC = 75 days.
| Component | Formula | Example |
|---|---|---|
| DIO | Inventory ÷ COGS × 365 | 60 days |
| DSO | Receivables ÷ revenue × 365 | 45 days |
| DPO | Payables ÷ COGS × 365 | 30 days |
| CCC | DIO + DSO − DPO | 75 days |
The Cash Value of Each Day
For this company, each day of DIO or DPO is worth about $10,000 (daily COGS), and each day of DSO is worth about $13,700 (daily revenue). If management cuts DIO by 10 days, DSO by 5 days, and extends DPO by 5 days, the CCC falls from 75 to 55 days, a 20-day improvement. Cash released: 10 × $10,000 + 5 × $13,700 + 5 × $10,000 = $218,500. That is cash that no longer needs to be funded by loans or equity, and it can reduce interest costs: at 8% interest, $218,500 saves about $17,500 a year.
Levers to Shorten the Cycle
Inventory: improve forecasting, use just-in-time ordering, reduce slow-moving stock, and negotiate consignment or vendor-managed inventory. Receivables: tighten credit approval, invoice promptly, follow up on overdue accounts, offer discounts for early payment, and require deposits. Payables: negotiate longer terms with suppliers, pay on the due date and not early, and use supply chain financing. Be careful not to damage relationships: stretching payables too far can lead to loss of discounts, higher prices, or supply interruptions. Balance the trade-offs, such as the cost of lost early-payment discounts against the benefit of holding cash longer.
Benchmarks and Cautions
Typical cycles vary: grocery retailers may have a CCC of 10 days or even negative; manufacturers 60 to 120 days; capital equipment makers more than 150. Compare with peers and track the trend. The CCC can be distorted by seasonality or one-time events. It is a rough indicator, best read with the underlying components. Use averages over a year if possible.
Frequently Asked Questions
What is the cash conversion cycle?
The number of days between paying for inventory and collecting cash from customers.
What is the CCC formula?
DIO plus DSO minus DPO.
Can the CCC be negative?
Yes, when a business collects from customers before paying suppliers.
How does shortening the CCC help?
It reduces working capital needs and financing costs.
What is DPO?
Days payables outstanding: how long a company takes to pay its suppliers.