Calculate operating cycle and cash conversion cycle from DIO, DSO, and DPO metrics.
Cycle Components
Enter your turnover days metrics (annual averages).
Understanding the Three Levers
Working capital is managed through these three critical time periods.
DIO
Days Inventory Outstanding: How long cash is trapped in stock sitting on shelves. Lower is better (leaner inventory).
DSO
Days Sales Outstanding: How long it takes customers to pay you after a sale. Lower is better (faster cash collection).
DPO
Days Payable Outstanding: How long you take to pay your suppliers. Higher is better (keeps cash in your pocket longer), provided it doesn't hurt relationships.
Profit is an opinion, but cash is a fact. The Cash Conversion Cycle measures how fast your company turns $1 invested in materials into $1 collect from customers.
Many business owners confuse these two metrics, but the difference is critical:
1. Operating Cycle (The Process Time)
The Operating Cycle is the total time it takes to purchase inventory, sell it, and collect the cash. Formula: DIO + DSO. This is typically positive. It represents the "shelf life" plus the "credit life" of your product.
2. Cash Conversion Cycle (The Funding Gap)
Because suppliers give you credit (DPO), you hold onto your cash for a while. The CCC measures the net time your own cash is tied up. Formula: Operating Cycle - DPO.
If your Operating Cycle is 60 days, but you act slow to pay suppliers (DPO = 60 days), your CCC is 0. You are effectively using supplier's money to run your business. This is the goal of efficient working capital management.
The Holy Grail: Negative CCC
Some companies, like Amazon or Dell, operate with a Negative Cash Conversion Cycle.
Amazon: You pay Amazon instantly (DSO ≈ 0). Inventory moves fast (DIO is low). But Amazon pays suppliers in 60-90 days (DPO is high).
Result: Amazon collects cash from you months before it pays for the goods. It sits on a mountain of cash that it can invest in growth, earning interest, or buying competitors.
Strategies to Reduce CCC
A lower CCC frees up cash. Here is how to achieve it:
Reduce DIO
Adopt Just-in-Time (JIT) inventory.
Remove slow-moving SKUs (80/20 rule).
Improve sales forecasting accuracy.
Drop-shipping models.
Reduce DSO
Offer "2/10 net 30" discounts.
Automate billing reminders.
Credit checks for new clients.
Invoice factoring (selling receivables).
Increase DPO
Negotiate longer terms (Net 60).
Pay on the due date, never early.
Consolidate suppliers for power.
But beware of relationships!
Supply Chain Financing
A modern tool to improve CCC is "Reverse Factoring." A bank pays your supplier immediately (helping them), but you pay the bank in 90 days (helping you). This effectively extends your DPO without angering suppliers. Many Fortune 500 companies use this to unlock billions in working capital.
Frequently Asked Questions
Why is a longer Operating Cycle bad?
It means capital is trapped in the business process (inventory on shelves, invoices in mail) rather than being in the bank. This reduces your ability to react to opportunities or emergencies.
Can DPO be too high?
Yes. If you stretch payments too far, suppliers may cut you off, increase prices to compensate for the delay, or lower the priority of your orders, hurting your operations.
Does CCC apply to service businesses?
Yes, though DIO is usually zero (no inventory). Service firms focus on DSO (getting paid by clients) vs DPO (paying freelancers/software costs).
How do I calculate DIO/DSO/DPO?
DIO = (Avg Inventory / COGS) * 365
DSO = (Avg Receivables / Credit Sales) * 365
DPO = (Avg Payables / Cost of Sales) * 365
What is a "good" CCC?
It depends on the industry. Supermarkets (cash sales) have low/negative CCC. Construction (milestone payments) often has high CCC. Compare yourself to competitors, not random industries.
Can aggressive DSO collection hurt sales?
Yes. Lenient credit terms are a form of marketing. If you demand "Cash on Delivery," customers might switch to a competitor offering "Net 30." You must balance cash flow vs. sales growth.
Why isn't cash included in current assets for this?
The Operating Cycle measures the efficiency of working assets (Inventory/Receivables). Cash is the result, not the input.
How often should I check this?
Monthly trending is best. A sudden spike in DSO is an early warning sign of bad debt risk before it hits the P&L.
Supply Chain ManagersTo balance inventory levels against cash flow constraints.
BankersTo assess the liquidity risk of a borrower before issuing a loan.
Turnaround ConsultantsThe first place they look to "find cash" in a distressed company is by squeezing the CCC.
Limitations
This calculator is a snapshot based on retrospective averages. Seasonality can cause massive swings in DIO/DSO that an annual average might hide. It also assumes inventory serves a single purpose, ignoring strategic stockpiling for shortages.
Real-World Example
The Dell Model
In its prime, Dell had a CCC of -10 days. Customers paid online (DSO=0). Dell ordered parts just-in-time (DIO=5). Suppliers were paid in 45 days (DPO=45). Eq: 5 + 0 - 45 = -40 days approx. Dell grew its business using its suppliers' money, avoiding interest payments.
Summary
The Operating Cycle Calculator provides a clear view of your working capital efficiency.
By monitoring the gap between your operating cycle and payment terms, you can unlock significant hidden cash flow within your business.
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Calculate operating cycle and cash conversion cycle from DIO, DSO, and DPO metrics.
How to use Operating Cycle Calculator
Step-by-step guide to using the Operating Cycle Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
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Frequently asked questions
How do I use the Operating Cycle Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Operating Cycle Calculator is designed to be user-friendly and provide instant calculations.
Is the Operating Cycle Calculator free to use?
Yes, the Operating Cycle Calculator is completely free to use. No registration or payment is required.
Can I use this calculator on mobile devices?
Yes, the Operating Cycle Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Operating Cycle Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.