Definition
The number of days between paying for inventory and collecting cash from customers.
Why it matters
Formula: DIO + DSO − DPO. A shorter cycle means less working capital is needed.
Where it shows up in a deal
A funder calculates the cycle from your financial statements during diligence to size the facility the business actually needs. It also appears in your own planning whenever you are weighing collections pressure, supplier terms and financing against each other, because those three levers move different parts of the same equation.
What it affects
- The cycle multiplied by daily sales is roughly the cash permanently tied up in operations.
- Growth lengthens the funding requirement even when every job is profitable.
- DIO and DPO are often easier to move than DSO, since customer terms are hardest to change.
- A long cycle paired with thin margins is the profile that fails fastest when sales accelerate.
A worked example
DIO 50 + DSO 46 - DPO 30 = a 66-day cycle. On annual sales of $9,125,000, daily sales are $25,000, so about $1,650,000 is tied up. Financing receivables so cash arrives on day 10 cuts the cycle to 30 days and the tied-up amount to $750,000, releasing roughly $900,000.
The common mistake
Related terms
- Days Sales OutstandingThe average number of days it takes to collect payment after a sale.
- Days Payable OutstandingThe average number of days a company takes to pay its suppliers.
- Working CapitalCurrent assets minus current liabilities — the cash available to run daily operations.
- Cash FlowThe net movement of cash into and out of a business over a period.
Questions about how cash conversion cycle affects your facility?
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