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Generally speaking, a shorter cash conversion cycle is better than a longer one because it means a business is operating more efficiently. Once you have values for DIO, DSO, and DPO, simply plug them into the cash conversion cycle formula above to determine the average number of days it takes to invest cash into inventory and see a return.įor example, if it takes your business an average of 14.2 days to turn over inventory (DIO = 14.2), 15.6 days to receive payment from customers (DSO = 15.6), and 17.3 days to pay suppliers (DPO = 17.3), your cash conversion cycle would be 12.5 days (or 14.2+15.6 - 17.3). So, generally speaking, a larger DPO is better (more on when this may not be true when we talk about improving your CCC below). Typically, the longer you have to pay your bills, the more it will shorten your cash conversion cycle, as it means you’re able to hold cash for longer after the sale of inventory. DPO is calculated using the following formula:ĭPO = ((Beginning Accounts Payable + Ending Accounts Payable)/COGS *2))* Period Calculate Days Payables Outstanding (DPO)ĭays Payables Outstanding is the average number of days it takes for your business to pay its bills. For example, businesses that require immediate payment will have a DSO of zero, whereas businesses that provide net 15 or net 30 payment terms, for instance, will have a positive number for their DSO. So a smaller number is generally better here. Reducing DSO will accelerate cash flow into your business. DSO is calculated using the following formula:ĭSO = ((Beginning Accounts Receivable + Ending Accounts Receivable) / (Revenue*2)) * Period Calculate Days Sales Oustanding (DSO)ĭays Sales Outstanding (DSO) is the average number of days it takes for your business to collect payment from its customers. Generally speaking, the smaller your DIO is (i.e., holding on to inventory for less time), the more efficiently your business is converting working capital into inventory and back again. DIO is calculated using the following formula:ĭIO = ((Beginning Inventory Value + Ending Inventory Value)/(COGS/2)) * Period Calculate Days Inventory Outstanding (DIO)ĭays Inventory Outstanding is the average number of days it takes to sell your entire inventory.

#ICASH REVIEWS HOW TO#

Here’s how to calculate each entity in the equation above using the information you gathered from your financial reports. With this information, we’ll calculate the individual metrics we need to determine your cash conversion cycle using the cash conversion cycle formula:Ĭash Conversion Cycle (CCC) = DIO + DSO – DPO

Cost of goods sold (COGS) for the period.

Accounts payable at the beginning/end of the period.

Accounts receivable at the beginning/end of the period.

Inventory value at the beginning/end of the period.

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