A wholesaler makes a profit every year and still needs an overdraft every spring. This cash conversion cycle calculator shows how many days your money waits between paying a supplier and being paid by a customer — and which part of the cycle holds the money.
| Balance | At the start | At the end |
|---|---|---|
| Inventory, at cost | ||
| Receivables — what customers owe you | ||
| Payables — what you owe suppliers |
| Part of the cycle | Average balance | Days | Cash in one day |
|---|
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Cash conversion cycle = DIO + DSO − DPO
The cycle counts the days from the day you pay a supplier to the day a customer pays you. For those days, your own money carries the goods. A profit does not reach the bank account until the cycle is over.
A wholesaler of garden tools closes the year with 730,000 of sales and a gross profit of 182,500. The profit is real.
But every spring the bank account is empty, and the owner asks the bank for an overdraft to pay the suppliers. Where is the money?
She takes the profit and loss of the year — 547,500 cost of goods sold, so 1,500 a day, and 2,000 of sales a day — and the balances at the start and the end of the year:
| Balance | At the start | At the end | Average | Part of the cycle | Days |
|---|---|---|---|---|---|
| Inventory | 110,000 | 130,000 | 120,000 | DIO | 80 |
| Receivables | 76,000 | 84,000 | 80,000 | DSO | 40 |
| Payables | 42,000 | 48,000 | 45,000 | DPO | − 30 |
| Cash in the cycle | 155,000 | Cycle | 90 |
For 90 days, each tool is paid for and not yet paid by a customer. The cycle holds 155,000 — almost the gross profit of the whole year.
Her first idea is to push the customers: payment in 30 days, not 40. Ten days of sales at 2,000 free 20,000. Some customers will not like it.
Then she looks at the table again. 80 of the 90 days are stock. Twenty days less stock — mostly the slow items at the back of the warehouse — free 20 × 1,500 = 30,000, and no customer is asked for anything.
The profit says the business earns money. The cycle says how long the business waits for it. To find the slow items, sort them with the ABC analysis or the stock-to-sales ratio calculator.
Put the days of the period in B2, the revenue in B3 and the cost of goods sold in B4. Put inventory, receivables and payables in rows 6, 7 and 8: the balance at the start in column B, at the end in column C. Then:
=AVERAGE(B6:C6)/B4*B2=AVERAGE(B7:C7)/B3*B2=AVERAGE(B8:C8)/B4*B2=B10+B11-B12Copy the block for each quarter, with the days of the quarter in B2. When the cycle grows, the row that grows with it tells you where to look: the stock, the customers or the suppliers.
There is no one good number. A shop paid at the till has almost no receivables. A wholesaler that gives payment terms and buys a season of stock ahead can have a cycle of 90 days or more. Compare your cycle with your own last year, and look for the part that grows.
Yes. When customers pay before you pay your suppliers, DPO is longer than DIO and DSO together. A shop that sells for cash, turns its stock fast and pays its suppliers in 30 days can have a negative cycle. Then the suppliers carry the stock.
Inventory and payables are at cost. Receivables are at the sales price. Each balance is divided by the flow at the same prices, so each result is in days. Some analysts use purchases for DPO; when the stock does not change much, the result is almost the same.
Yes. An unpaid invoice includes VAT, but the revenue in the profit and loss does not. So DSO reads too high by the VAT rate: with 20 % VAT, 40 days read as 48. Take the VAT out of the receivables, or add it to the revenue.
The average of the start and the end is the usual choice. If your balances change much during the year — a season, one large order — use the average of the twelve month ends.
In money, the cycle is inventory + receivables − payables: the cash your trade holds. The calculator shows it in the last row. Each day less of DIO, or each day more of DPO, is worth one day of cost of goods sold; each day less of DSO is worth one day of revenue.
In Golden Inventory, Profit and Loss on the accrual basis gives the revenue and the cost of goods sold, on every plan. Inventory Valuation, A/R Aging and A/P Aging give the three balances of today; they are Pro reports. Start on the free plan, no card.