Working Capital and Cash Conversion Cycle#

The Cash Conversion Cycle (CCC) measures how long it takes a company to convert its investments in inventory and other resources into cash from sales. A shorter cycle means faster cash generation.

Cash Conversion Cycle = DIO + DSO - DPO

Where:

DIO = Days Inventory Outstanding
DSO = Days Sales Outstanding
DPO = Days Payable Outstanding

Days Inventory Outstanding (DIO)#

DIO measures how many days, on average, inventory sits before being sold.

DIO = (Average Inventory / COGS) × 365

Or: 365 / Inventory Turnover

Interpretation#

DIO	Meaning
Lower	Faster inventory movement—less capital tied up
Higher	Slower inventory movement—more capital required

Industry Benchmarks#

Industry	Typical DIO
Grocery	15-25 days
Retail	45-90 days
Manufacturing	60-120 days
Aerospace	200+ days

Too Low Can Be Bad

Extremely low DIO might indicate inadequate inventory leading to stockouts and lost sales. Balance efficiency with customer service.

Days Sales Outstanding (DSO)#

DSO measures how many days, on average, it takes to collect payment from customers.

DSO = (Average Accounts Receivable / Revenue) × 365

Or: 365 / Receivables Turnover

Interpretation#

DSO	Assessment
< 30 days	Excellent collection efficiency
30-45 days	Standard for most businesses
45-60 days	May need improvement
> 60 days	Potential collection problems

Industry Context#

Business Type	Typical DSO
Cash/credit card sales	1-5 days
Consumer products	30-45 days
B2B services	45-60 days
Government contracts	60-90+ days

Days Payable Outstanding (DPO)#

DPO measures how long a company takes to pay its suppliers.

DPO = (Average Accounts Payable / COGS) × 365

Or: 365 / Payables Turnover

Interpretation#

DPO	Assessment
High (45-60+)	Preserves cash, uses supplier financing
Low (15-30)	Pays quickly, may get discounts

The Trade-off#

High DPO: Keeps cash longer but may strain supplier relationships
Low DPO: Uses cash faster but may earn early payment discounts

The Cash Conversion Cycle#

Calculation#

Component	Formula	Days
DIO	(Inventory/COGS) × 365	45
DSO	(AR/Revenue) × 365	35
DPO	(AP/COGS) × 365	30
CCC	DIO + DSO - DPO	50 days

Interpretation#

CCC	Meaning
Positive	Cash is tied up for that many days
Zero	Operations are self-funding
Negative	Company is funded by suppliers/customers

Examples by Company Type#

Company Type	Typical CCC
Amazon	Negative (-20 to -30 days)
Dell (direct model)	Negative
Traditional retailer	30-60 days
Manufacturer	60-120 days
Aerospace	150-250 days

Negative CCC = Competitive Advantage

Companies with negative CCC (like Amazon) get paid before they pay suppliers—effectively using supplier and customer money to fund operations. This is a powerful working capital advantage.

Practical Application#

Analyzing Working Capital Efficiency#

Metric	Company	Industry	Assessment
DIO	55 days	45 days	Slow inventory movement
DSO	40 days	35 days	Slightly slow collections
DPO	35 days	40 days	Pays faster than peers
CCC	60 days	40 days	Less efficient

Conclusion: Company has 20 more days of cash tied up than peers—opportunity for improvement.

Trend Analysis Red Flags#

Trend	Potential Issue
Rising DIO	Inventory buildup, obsolescence risk
Rising DSO	Collection problems, customer quality
Falling DPO	Loss of supplier terms or leverage
Rising CCC	Overall working capital deterioration

Working Capital Optimization#

To shorten CCC:

Reduce DIO: Better inventory management, demand forecasting
Reduce DSO: Tighter credit terms, faster collections
Increase DPO: Negotiate better supplier terms

Key Takeaways

DIO = Days Inventory Outstanding—how long inventory sits
DSO = Days Sales Outstanding—time to collect from customers
DPO = Days Payable Outstanding—time to pay suppliers
CCC = DIO + DSO - DPO—total days cash is tied up
Negative CCC (Amazon, Dell) is a competitive advantage
Compare to industry peers—groceries have low CCC; aerospace has high CCC
Rising CCC trend indicates deteriorating working capital efficiency