Cash cycle: drag payables
Drag the handle to set days payable outstanding. Receivables and inventory days are held still, so the headline cash conversion cycle moves only because suppliers are funding more of the loop. Stretch payables past the operating cycle and the residual turns negative.
Cash conversion cycle
75 days
Operating cycle
105 days
Receivables 45 plus inventory 60 is a 105 day operating cycle. Stretch payables and the cash the firm still has to fund falls. Illustrative arithmetic, not a cash forecast or advice.
DSO and DIO
45 and 60 days, held still so only payables move the residual.
In short
- Drag the handle right to stretch payable days.
- Read CCC, then the operating cycle, which does not move on this picture.
- Push DPO past 105 days, where the residual crosses through zero.
- Focus the handle and use the arrow keys to step payable days.
Three clocks, one residual
DSO asks how long customers take to pay. DIO asks how long stock sits. DPO asks how long the firm takes to pay suppliers. Add the first two and you have the operating cycle. Subtract DPO and you have how much of that loop the firm still funds itself.
How the cash conversion cycle works is the identity, with the cash conversion cycle calculator under the answer. Working capital is the same loop in dollars.
Negative is a source of cash
When payables outrun the operating cycle, suppliers are paid after the cash from the sale is already in. That is a business that has shifted funding onto its suppliers, not a bug in the formula.
It is also not free. Stretch DPO far enough and suppliers raise prices, cut service, or walk. The formula will still print a prettier number.
Growth consumes the same days in more dollars
A 75 day cycle on a growing firm consumes more cash next year than this year, because the same days sit on a larger sales number. An increase in net working capital is subtracted when profit is turned into free cash flow. How working capital works is the dollar gap.
Common questions
Why does stretching payables cut CCC?
Because CCC is the operating cycle minus DPO. Hold the first two clocks and raise the third, and the residual the firm funds itself falls.
Is a negative cycle a warning?
Not by itself. It means suppliers fund the loop. Compare it inside a sector, and watch whether the stretch is being paid for in price or service.
Is this a cash forecast?
No. It is days in, days out. It is educational material, not advice.
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.