How this calculator works
The cash conversion cycle follows a dollar through the working capital of a business. Inventory days measure how long stock sits before it is sold, receivable days measure how long customers take to pay, and payable days measure how long the business takes to pay its own suppliers. Adding the first two and subtracting the third gives the number of days the business finances its operations itself. A short or negative cycle, common in retail and subscription businesses, means suppliers and customers fund the operation. A long cycle ties up cash and increases the need for borrowing.
Formula
Days inventory outstanding = average inventory / cost of goods sold × days in the period. Days sales outstanding = average receivables / revenue × days in the period. Days payable outstanding = average payables / cost of goods sold × days in the period. Cash conversion cycle = DIO + DSO - DPO.
Worked example
Over a 365 day year with $600,000 of cost of goods sold, $1,000,000 of revenue, average inventory of $120,000, average receivables of $150,000 and average payables of $90,000, the days are 73.0, 54.75 and 54.75. The cycle is 73.0 + 54.75 - 54.75 = 73.0 days.
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Frequently asked questions
Can the cash conversion cycle be negative?
Yes. Grocery chains and subscription businesses often collect from customers before they pay suppliers, which produces a negative cycle. The business then uses its working capital as a source of cash rather than a use of it.
Should I use revenue or cost of goods sold for receivable days?
Receivables are recorded at selling price, so receivable days use revenue. Inventory and payables are recorded at cost, so inventory days and payable days use cost of goods sold. Mixing the bases produces a meaningless cycle.
Why use average balances?
A single year-end balance can be unusually high or low. Averaging the opening and closing balances smooths seasonality and gives a day count that better represents the whole period. If only one balance is available, use it and read the answer as approximate.