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DSO vs DIO in the cash cycle

DSO is days sales outstanding: how long customers take to pay. DIO is days inventory outstanding: how long stock sits. 45 plus 60 is a 105 day operating cycle. Minus 30 days of payables leaves a 75 day cash conversion cycle.

 Days sales outstandingDays inventory outstanding
What it timesCustomers. Invoices not yet cash.Stock. Units not yet sold.
Teaching sheetDSO 45 days.DIO 60 days. Together an operating cycle of 105 days. Minus DPO of 30, CCC of 75 days.
A negative CCCDSO 30 days.DIO 20 days. Operating cycle 50 days. DPO 100 days. CCC minus 50 days: suppliers fund the loop.
Equal clocksDSO 40 days.DIO 40 days. DPO 40 days. Operating cycle 80, CCC 40. Equal clocks are not a target.
What a longer clock doesTies cash in receivables. Collecting faster shortens CCC.Ties cash in stock. Turning inventory faster shortens CCC.
When you would pick itA collections question: how long sales sit as IOUs.A stock question: how long units sit on the floor.
On this page

Two clocks inside one cycle

DSO and DIO are the two clocks that add to the operating cycle. DPO, days payable outstanding, is the third clock, and it comes off.

operating cycle=DSO+DIO\text{operating cycle} = \text{DSO} + \text{DIO}

CCC=DSO+DIO−DPO\text{CCC} = \text{DSO} + \text{DIO} - \text{DPO}

45 days of receivables plus 60 days of inventory is 105 days in the loop before a supplier has funded any of it. Minus 30 days of payables leaves 75 days the firm still has to fund itself.

DSO 30, DIO 20, DPO 100: operating cycle 50, CCC minus 50. Suppliers are paid 50 days after the cash from the sale is already in. DSO 40, DIO 40, DPO 40: operating cycle 80, CCC 40. Equal clocks are a teaching sheet, not a goal.

How the cash conversion cycle works is the residual. How working capital works is the dollar version of the same loop. Working capital is the stock. The cash conversion cycle is the days.

A longer DSO is not a longer DIO

Collecting slower and holding more stock both lengthen the operating cycle, and they do not substitute. A manufacturer with a long production cycle can print a long DIO and a tight DSO. A firm that sells on 90 day terms can print a long DSO and almost no inventory. Adding them is how you see the loop. Quoting one as if it were the cycle is how a collections problem gets read as a warehouse problem.

This is educational material, not financial advice.

Worked examples

45 plus 60 minus 30

DSO 45, DIO 60, DPO 30. What is the operating cycle, and what is CCC?

  1. Operating cycle: 45+60=10545 + 60 = 105 days.
  2. Cash conversion cycle: 105−30=75105 - 30 = 75 days.

The operating cycle is 105 days. The cash conversion cycle is 75 days. DSO is 45 of those days and DIO is 60.

A negative cycle

DSO 30, DIO 20, DPO 100. What is CCC?

  1. Operating cycle: 30+20=5030 + 20 = 50 days.
  2. CCC: 50−100=−5050 - 100 = -50 days.

The operating cycle is 50 days. CCC is minus 50 days. DSO is 30 and DIO is 20. Suppliers fund the cycle.

Equal clocks

DSO 40, DIO 40, DPO 40. What is CCC?

  1. Operating cycle: 40+40=8040 + 40 = 80 days.
  2. CCC: 80−40=4080 - 40 = 40 days.

The operating cycle is 80 days. CCC is 40 days. DSO and DIO are each 40 of the operating cycle.

Common questions

Is a lower DSO always better?

It is cash coming in sooner, on this clock. Tight terms can also cost sales. The 45 day teaching sheet is a count, not a target.

Can DIO be zero?

A firm that sells a service and holds no stock prints a DIO of zero. Then the operating cycle is just DSO, and CCC is DSO minus DPO.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.