How long cash is tied up
Every business that sells goods ties up cash: it pays suppliers, holds inventory, then waits for customers to pay. The cash conversion cycle measures that delay in days. The shorter it is, the less financing the business needs to grow.
The formulas
- DSO (days sales outstanding) = receivables ÷ revenue × 365
- DIO (days inventory outstanding) = inventory ÷ cost of goods sold × 365
- DPO (days payables outstanding) = payables ÷ cost of goods sold × 365
- Cash conversion cycle = DSO + DIO − DPO
- Operating working capital = receivables + inventory − payables
Use average balances over the year when you have them; year-end figures can be distorted by seasonality.
Worked example
| Item | Amount |
|---|---|
| Revenue | $1,200,000 |
| Cost of goods sold | $720,000 |
| Receivables | $150,000 |
| Inventory | $120,000 |
| Payables | $90,000 |
- DSO: 150,000 ÷ 1,200,000 × 365 ≈ 45.6 days.
- DIO: 120,000 ÷ 720,000 × 365 ≈ 60.8 days.
- DPO: 90,000 ÷ 720,000 × 365 ≈ 45.6 days.
- Cash conversion cycle: 45.6 + 60.8 − 45.6 ≈ 60.8 days.
- Working capital: 150,000 + 120,000 − 90,000 = $180,000, about 55 days of revenue.
- Inventory turnover: 720,000 ÷ 120,000 = 6 times a year.
Why it matters
If revenue grows 20% and the cycle stays at 61 days, working capital grows roughly 20% too: about $36,000 of extra cash needed, even if the business is profitable. Fast-growing companies often run short of cash for exactly this reason.
Ways to shorten the cycle
- Collect faster: invoice promptly, offer card or ACH payment, follow up on late invoices, consider early-payment discounts.
- Hold less stock: drop slow-moving items, order more often in smaller quantities, improve forecasts.
- Pay suppliers on terms: use the full agreed payment period, and negotiate longer terms where possible, without damaging relationships.
Benchmarks
Grocery retailers and online marketplaces often have negative cycles, collecting from customers before paying suppliers. Manufacturers and distributors commonly run 40 to 120 days. Compare against your own history and companies in your sector rather than a universal target.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.