The formula
CCC = DSO + DIO − DPO
- DSO, days sales outstanding = receivables ÷ revenue × 365. How long customers take to pay.
- DIO, days inventory outstanding = inventory ÷ cost of goods sold × 365. How long goods sit in stock before they are sold.
- DPO, days payables outstanding = payables ÷ cost of goods sold × 365. How long the company takes to pay its suppliers.
Inventory and payables are both measured at cost, so DIO and DPO divide by cost of goods sold. Receivables include the profit margin, so DSO divides by revenue. Supplier credit is subtracted because every day you wait to pay a supplier is a day the supplier, not you, finances the business.
Reading the example
In FY2025 the company collected after 40 days, held stock for 60 days and paid suppliers after 55 days: a cycle of 45 days. In FY2026 revenue grew 11.1%, but customers paid more slowly (45 days), the warehouse filled up (70 days), and suppliers were paid faster (50 days). The cycle rose to 65 days.
All three moved in the wrong direction at once, which is a common pattern in fast growth: generous payment terms win new customers, extra stock protects against stock-outs, and suppliers demand faster payment from a customer whose orders are growing.
Worked example: the same company, two years
Balances are year-end figures. The days formulas point to the 365 in B7 with an absolute reference, so you can switch to 360 in one cell.
| A | B | C | Formula in C | |
|---|---|---|---|---|
| 1 | FY2025 | FY2026 | ||
| 2 | Revenue | 6,570,000 | 7,300,000 | |
| 3 | Cost of goods sold | 3,942,000 | 4,380,000 | |
| 4 | Accounts receivable (year-end) | 720,000 | 900,000 | |
| 5 | Inventory (year-end) | 648,000 | 840,000 | |
| 6 | Accounts payable (year-end) | 594,000 | 600,000 | |
| 7 | Days in the year | 365 | ||
| 8 | DSO (days sales outstanding) | 40.0 | 45.0 | =C4/C2*$B$7 |
| 9 | DIO (days inventory outstanding) | 60.0 | 70.0 | =C5/C3*$B$7 |
| 10 | DPO (days payables outstanding) | 55.0 | 50.0 | =C6/C3*$B$7 |
| 11 | Cash conversion cycle (days) | 45.0 | 65.0 | =C8+C9-C10 |
| 12 | Cash tied up: AR + inventory − AP | 774,000 | 1,140,000 | =C4+C5-C6 |
What the days cost in cash
Days become dollars through the balances. Receivables + inventory − payables rose from $774,000 to $1,140,000. Part of that is simply growth. To isolate the effect of the slower cycle, ask what the balances would have been in FY2026 at FY2025's days: receivables of $800,000, inventory of $720,000 and payables of $660,000, together $860,000. The difference, $280,000, is cash the business had to find, from its bank account or a credit line, only because the cycle got longer.
A quick rule of thumb works the other way round: one day of DSO is worth one day of revenue, here $20,000. Collecting five days faster would free $100,000.
Year-end or average balances, 365 or 360 days
Textbooks differ. Some use average balances ((opening + closing) ÷ 2), others year-end balances. Some banks use 360 days. Averages smooth out a single unusual year-end, while year-end balances show the latest position. Neither is wrong. What matters is that you use the same method for every year and every company you compare. Seasonal businesses are a special case: a retailer's December balance sheet can look very different from its June one.
How companies shorten the cycle
Each part of the formula has its own levers. DSO falls with faster invoicing, clear payment terms, reminders and early-payment discounts. DIO falls with better demand forecasts, smaller and more frequent orders, and clearing out slow-moving stock. DPO rises when a company negotiates longer supplier terms, ideally without paying for them through higher prices. Every lever has a cost, so compare the cash freed with what it costs in discounts, lost sales or supplier goodwill.
What is a good cash conversion cycle?
It depends on the business model, so compare a company with its own history and with peers in the same industry. Retailers that are paid in cash at the till and pay suppliers on credit can have a short or even negative cycle: the suppliers finance the stock. Manufacturers with long production times and business customers who pay on 60-day terms often have long cycles. Service businesses with little inventory set DIO close to zero.
Common mistakes
- Dividing inventory or payables by revenue. Both are carried at cost, so use cost of goods sold. Using revenue understates DIO and DPO.
- Adding DPO instead of subtracting it. Supplier credit shortens the cycle.
- Mixing periods. Quarterly revenue with 365 days gives days four times too low. For a quarter, use about 91 days.
- Comparing companies with different methods, such as average balances for one and year-end balances for another.
- Celebrating a shorter cycle without asking why. Paying suppliers very late or running out of stock also shortens it, and both can damage the business.
Frequently asked questions
Can the cash conversion cycle be negative?
Yes. If a company collects from customers and sells its stock before it has to pay its suppliers, DPO is larger than DSO + DIO. Then suppliers effectively finance the operations.
Should I use credit sales or total revenue for DSO?
Credit sales are more precise, because cash sales never become receivables. Published accounts usually show only total revenue, so analysts use that and stay consistent.
Is a lower cash conversion cycle always better?
Usually, because less cash is tied up. But check the reasons: a cycle that shrinks because stock runs out or suppliers are paid late can cause bigger problems than it solves.
How do I calculate the CCC for a quarter?
Use the quarter's revenue and cost of goods sold and replace 365 with the number of days in the quarter, about 91. Keep the balances at the quarter-end.