How it works
- Cash conversion cycle
- The cash conversion cycle is the number of days between paying for inputs and collecting cash from the customer: days to collect, plus days stock sits, minus days you take to pay suppliers.
- DSO = accounts receivable ÷ annual revenue × 365
- DIO = inventory ÷ annual cost of sales × 365
- DPO = accounts payable ÷ annual cost of sales × 365
- Cash conversion cycle = DSO + DIO − DPO
- Cash freed per day ≈ annual revenue ÷ 365
Where the cash usually is
For most owner-managed businesses the biggest lever is DSO: invoicing the day work is done, clear payment terms, and a weekly collections routine. Each day shaved off releases roughly a day of revenue into the bank.
Balances at a single date can mislead in a seasonal business. Averages across the year, or a month-end trend, give a truer picture. We track these as part of monthly reporting.
Questions
What is a good cash conversion cycle?
Lower is better, and it varies widely by industry. A trades business that invoices on completion and pays suppliers on 30-day terms can run a short cycle; a manufacturer holding raw materials will run a longer one. The trend in your own numbers matters more than a benchmark.
Can the cycle be negative?
Yes. If customers pay before you pay your suppliers, as in many retail and subscription businesses, the cycle can be negative, which means suppliers are effectively financing your operations.
Why use cost of sales for inventory and payables?
Inventory and supplier bills are recorded at cost, so measuring them against cost of sales gives a like-for-like number of days. Receivables are measured against revenue for the same reason.
General information, not advice for your situation. Results are only as good as the numbers you enter.