How to use the cash conversion cycle calculator
- Revenue and cost of goods sold come from the income statement. Use the same period for both, usually a year.
- Average receivables, inventory and payables come from the balance sheet. Add the opening and closing balances for the period and divide by 2. If the business is seasonal, an average of monthly or quarterly balances is more accurate.
- Days in the period must match the revenue and COGS: 365 (or 360) for a year, 90 for a quarter.
A service business with no stock can enter 0 for inventory; the cycle is then just DSO minus DPO.
The formulas
DIO = Average inventory ÷ COGS × Days
DPO = Average payables ÷ COGS × Days
Cash conversion cycle = DSO + DIO − DPODays is the length of the period: 365, 360 or 90. DSO is measured against revenue because receivables are recorded at selling prices; DIO and DPO are measured against COGS because inventory and supplier bills are recorded at cost.
Payables turnover = COGS ÷ Average payables
Cash tied up ≈ CCC × (COGS ÷ Days)Each turnover is the number of times the balance is collected or paid in the period. Days ÷ turnover gives the matching day count.
A worked example
Company B, a distributor, sold $2,400,000 of goods last year at a cost of $1,560,000. On average it was owed $290,000 by customers, held $260,000 of stock and owed suppliers $180,000.
Customers took 44.1 days to pay, a receivables turnover of 8.28×. Stock sat for 60.8 days before it sold. Suppliers were paid after 42.1 days, a payables turnover of 8.67×.
The cash conversion cycle is 62.8 days: the gap between paying suppliers and collecting from customers. At $4,274 of COGS a day, that ties up roughly $268,500.
The chart under the calculator shows the same story in two bars. The first is the operating cycle (DSO + DIO), the full time from receiving stock to collecting cash. The second splits that time into the part suppliers fund through their payment terms and the part the business funds itself, which is the cash conversion cycle.
Why “cash tied up” is an approximation
Multiplying the cycle by daily COGS is a quick way to put a dollar figure on it, and it is the number many textbooks use. It values every day in the cycle at cost. But receivables are recorded at selling prices, so the balance sheet holds more money in the cycle than this estimate: receivables plus inventory minus payables comes to $370,000 in the example, against the estimate of $268,500. The gap is the gross profit sitting inside unpaid invoices.
Both figures are useful. The CCC estimate shows the cost of the goods being financed; the balance sheet figure shows the cash that would actually arrive if the cycle shrank to zero. For decisions about a specific lever, the table under the calculator uses the right value for each component.
Which lever frees the most cash
Each day cut from the cycle releases cash once, and keeps it released as long as the new terms hold:
| Change of 10 days | Cash freed |
|---|---|
| Customers pay 10 days sooner | $65,753 |
| Stock sells or is reordered 10 days sooner | $42,740 |
| Suppliers paid 10 days later | $42,740 |
| All three together | $151,233 |
A day of DSO is worth more than a day of DIO or DPO, because it is measured in revenue rather than cost. In practice the levers carry different costs:
- Collecting sooner can mean tighter credit checks, invoicing promptly, automated reminders or a discount for early payment. Customers may push back or buy elsewhere.
- Holding less stock lowers storage and obsolescence costs too, but raises the risk of running out. The inventory turnover calculator shows the holding cost side.
- Paying later costs nothing directly, but suppliers may raise prices or tighten terms, and it can mean giving up early-payment discounts. Passing up a 2% discount for paying within 10 days instead of 30 is equivalent to borrowing at about 37% a year (simple rate).
When the cycle is negative
Some businesses collect cash before they pay for the goods they sold. With the negative-cycle scenario, a retailer that collects in 5.0 days, sells stock in 20.0 days and pays suppliers after 50.0 days has a cycle of -25.0 days. Receivables plus inventory minus payables is -$190,000: suppliers are funding the business. For such a company, growth releases cash instead of using it, which is part of why large retailers can expand quickly. The same model can reverse sharply if sales fall, because the supplier bills from busier months still have to be paid.
Days in the period
The period setting changes the day counts but not the economics. Using 360 days instead of 365 shortens every figure slightly, giving a cycle of 62.0 days instead of 62.8 days. For a quarter, enter one quarter’s revenue and COGS with 90 days; with a quarter of the example’s figures, the cycle is 62.0 days, the same as the 360-day result, because four 90-day quarters add up to 360 days. What matters is to keep the same convention when comparing periods or companies.
What this calculator does not include
The calculation uses averages, so it hides the spread: a few very late customers can sit behind a reasonable DSO. It uses total revenue rather than credit sales, which overstates receivables turnover when part of the sales are paid in cash at the till. DPO based on COGS ignores purchases that are not inventory, such as rent or marketing paid on credit. Seasonal businesses should compare the same quarter across years, because year-end balances may be far from typical. For the balance sheet view of the same items, use the working capital calculator.