What this calculator does
The cash conversion cycle measures how long money is tied up in the business before it comes back. Inventory sits, customers take time to pay, and suppliers extend credit that works in the opposite direction.
It is one of the few operating metrics that can be improved in three independent ways. Collecting faster, holding less stock, or negotiating longer supplier terms each shortens the cycle, and a business that gets all three right can reach a negative cycle where customers effectively fund it.
The formula
Days sales outstanding, days inventory outstanding and days payable outstanding each convert a balance into days by comparing it against the relevant daily flow. The cycle is receivables days plus inventory days minus payables days.
| Term | Meaning |
|---|---|
| DSO | Days sales outstanding: how long customers take to pay. |
| DIO | Days inventory outstanding: how long stock sits before being sold. |
| DPO | Days payable outstanding: how long the business takes to pay suppliers, which reduces the cycle. |
The inputs explained
| Field | What to enter |
|---|---|
| Average accounts receivable ($) | Average accounts receivable over the period. |
| Average inventory ($) | Average inventory over the period. |
| Average accounts payable ($) | Average accounts payable over the period. |
| Revenue for the period ($) | Revenue for the period, used for the receivables calculation. |
| Cost of goods sold for the period ($) | Cost of goods sold, used for inventory and payables. |
| Days in the period | Days in the period. Use 365 for a full year. |
When to use it
Finding where cash is stuck
Breaking the cycle into its three components shows which one is doing the damage.
Assessing the effect of supplier terms
Extending payment terms shortens the cycle directly, without changing anything operational.
Sizing a working capital facility
The length of the cycle multiplied by daily costs gives a rough figure for the funding gap.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much do supplier terms shorten the cycle?
The same business with three levels of accounts payable.
| Average payables | Cash conversion cycle | Days payable outstanding (DPO) |
|---|---|---|
| $30k | 45.6 days | 13.7 days |
| $60k | 31.9 days | 27.4 days |
| $120k | 4.6 days | 54.8 days |
Questions
What is a good cash conversion cycle?
Shorter is generally better, but the sensible range depends on the industry. A retailer selling fresh goods for cash might run a negative cycle; a manufacturer with long production runs might reasonably sit at ninety days or more.
How can the cycle be negative?
When suppliers are paid later than customers pay, with stock moving quickly in between. The business is then funded by its own trade cycle, which is a genuinely strong position.
Why does inventory use COGS rather than revenue?
Because inventory is carried at cost, not at selling price. Comparing a cost figure against a revenue flow would understate the days, so the cost of goods sold is the correct denominator.
Is stretching supplier payments a good strategy?
Within agreed terms, yes. Beyond them it damages supplier relationships and can cost more in lost discounts or worse pricing than the cash flow benefit is worth.
For the capital that cycle ties up, see the working capital calculator. For how quickly stock and receivables move, see the turnover ratios calculator.