| Measure | Formula | Your figures | Days |
|---|---|---|---|
| DSO — days sales outstanding | Trade receivables ÷ revenue × 365 | 2,400 ÷ 14,600 × 365 | 60.0 |
| DIO — days inventory outstanding | Inventory ÷ cost of goods sold × 365 | 1,650 ÷ 10,950 × 365 | 55.0 |
| DPO — days payables outstanding | Trade payables ÷ cost of goods sold × 365 | 1,200 ÷ 10,950 × 365 | 40.0 |
| Cash conversion cycle | DSO + DIO − DPO | 60.0 + 55.0 − 40.0 | 75.0 |
| Lever | Days | Value of one day | Cash released |
|---|---|---|---|
| Collect faster — reduce DSO | 10.0 | Revenue per day ₹40 lakh | ₹400 lakh |
| Hold less stock — reduce DIO | 5.0 | Cost of goods sold per day ₹30 lakh | ₹150 lakh |
| Pay on agreed terms, not early — extend DPO | 5.0 | Cost of goods sold per day ₹30 lakh | ₹150 lakh |
The cash conversion cycle is the gap, in days, between paying suppliers and collecting from customers. A cycle of 75 days means the business funds about 75 days of trading from its own cash or from the bank. There is no single right figure: a distributor, a project contractor and a software company will sit in very different places. What matters is the direction month on month, and which of the three measures is moving it.
The cycle is also an average, and averages hide the problem. A DSO of 60 days can be made of most customers paying in 30 and a handful not paying at all. Once the cycle shows which measure has slipped, go to the detail behind it: the receivables ageing for DSO, the slow and non-moving stock list for DIO, and the vendor ageing for DPO.
Working capital funded by a bank limit? Compute the drawing power from the same stock and debtors, or build the CMA data and MPBF working.
The cash conversion cycle is DSO plus DIO minus DPO. DSO (days sales outstanding, or debtor days) is trade receivables divided by revenue, multiplied by 365. DIO (days inventory outstanding, or inventory days) is inventory divided by cost of goods sold, multiplied by 365. DPO (days payables outstanding, or creditor days) is trade payables divided by cost of goods sold, multiplied by 365. This calculator uses a 365-day basis throughout and says so on the screen and in both downloads, so that the figure can be reproduced by anyone who picks up the working.
The result is the number of days of trading the business has to fund. Stock sits for DIO days before it is sold; the customer then takes DSO days to pay; and against that, suppliers give DPO days of credit. In money, the same idea is trade receivables plus inventory minus trade payables — the cash tied up in trade working capital. Multiply that by the borrowing rate and you have a rough annual cost of carrying the cycle when it is funded by a cash credit or working-capital loan.
The what-if panel turns days into rupees. One day of DSO is worth revenue divided by 365. One day of DIO or DPO is worth cost of goods sold divided by 365. So a ten-day reduction in DSO releases ten days of revenue in cash, once, and saves interest on that amount every year after. These are arithmetic results on the figures entered; whether ten days is achievable depends on the customers, the contracts and the stock behind the average.
Balances can be closing or average. Closing balances are quicker and are what a monthly MIS usually uses; the average of opening and closing is closer to the construction used for the turnover ratios disclosed under Schedule III to the Companies Act 2013. Either is acceptable provided the same basis is used every period — the trend is only meaningful if the method does not change.
Illustrative figures in ₹ lakh. Revenue for the year is 14,600 and cost of goods sold is 10,950. At the year-end, trade receivables are 2,400, inventory is 1,650 and trade payables are 1,200. The working-capital borrowing rate is 10% a year.
