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Finance · level 1

Cash conversion cycle

How many days the business funds itself before the customer pays. Every day removed releases roughly one day of revenue in cash.

Theory: Accounting & Financial Statements

Worked example: DSO 40 days, DIO 42 days, DPO 60 days. Cash conversion cycle?

DSO + DIO82 days
DPO60 days
CCC22 days

Step by step

  1. 1

    Cash out, cash in

    CCC = DSO + DIO − DPO

  2. 2

    Add the drags

    40 + 42 = 82 days

  3. 3

    Subtract supplier financing

    − 60 = 22 days

  4. 4

    Convert to money

    Each day of CCC costs roughly daily revenue in working capital.

DSO 40 days, DIO 42 days, DPO 60 days. Cash conversion cycle? = 22

The theory behind it

Intuition

DSO + DIO − DPO is how many days of cash the business finances for its customers and suppliers. Fewer days means growth funds itself.

Common pitfalls

  • ×Using revenue instead of cost of goods sold for inventory days.
  • ×Treating a longer payables cycle as free money regardless of supplier terms.

In the interview

Operations and turnaround rounds where cash, not profit, is the constraint.