The cash conversion cycle is how long your own money is out of your pocket before customers pay it back.
The cash conversion cycle is days inventory outstanding plus days sales outstanding minus days payables outstanding. It measures how many days cash is tied up between paying suppliers and collecting from customers. A shorter cycle frees cash; each day removed is worth roughly one day of sales or costs.
Cash conversion cycle = DIO + DSO − DPO
Use the same period and the same number of days, usually 365 for a year, in all three.
| Measure | Inputs | Days |
|---|---|---|
| DIO | Inventory 300,000; cost of sales 2,433,333 | 45 |
| DSO | Receivables 520,000; credit sales 3,650,000 | 52 |
| DPO | Payables 253,333; cost of sales 2,433,333 | 38 |
| Cash conversion cycle | 45 + 52 − 38 | 59 |
With credit sales of 3,650,000 a year, one day of sales is 10,000. Cutting DSO from 52 to 42 days would release about 100,000 of cash, without selling anything more.
Be careful with stretching suppliers beyond agreed terms: it damages relationships, can cost you supply, and for large UK companies late payment is publicly reported.
Without inventory, the cycle is simply DSO minus DPO. For most service firms, collections are where the cash is, and work in progress that has not yet been billed adds to the cycle in the same way inventory does. See DSO, best possible DSO and CEI.
The formula is the same in the UK and the US. UK companies often say debtor days and creditor days for DSO and DPO. In both countries, compare your cycle with your own history and close competitors rather than a general benchmark, because it varies widely by industry.
Work out DSO and the cash tied up in late payers. Free to use online.
The Credit Control & Receivables System calculates ageing, DSO, best-possible DSO and CEI from the ledger, shapes a bad debt provision to IFRS 9 / ASC 326 logic and requires independent approval for credit limits and write-offs. Excel, no macros, one-time price.
Yes. If you collect from customers before you pay suppliers, as many retailers and subscription businesses do, the cycle is negative, meaning suppliers fund your working capital.
Purchases is more accurate if you have it, because payables relate to what you bought. Cost of sales is a common substitute. Use the same choice every period.
Monthly, using the same method each time, and look at the trend over at least six months. A single month can be distorted by a large invoice, a stock delivery or a payment run falling either side of month end.
Usually receivables. Collecting faster rarely damages a relationship if done politely and consistently, while cutting stock risks lost sales and paying suppliers later risks your supply.
It depends on the industry. The useful comparison is your own trend: a cycle that is lengthening month after month is a warning sign even if it looks normal for your sector.
Last updated 18 October 2026. General guidance for finance teams; check it against your own policies, systems and local rules.