> DSO, DPO, DIO, cash conversion cycle — managing accounts receivable, inventory, and payables for optimal liquidity.
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DSO, DPO, DIO, cash conversion cycle — managing accounts receivable, inventory, and payables for optimal liquidity.
The CCC measures how many days it takes to convert working capital investments into cash:
CCC = DSO + DIO - DPO
| Component | Formula | Meaning |
|---|---|---|
| DSO (Days Sales Outstanding) | (Accounts Receivable / Revenue) x 365 | How long customers take to pay |
| DIO (Days Inventory Outstanding) | (Inventory / COGS) x 365 | How long inventory sits before being sold |
| DPO (Days Payable Outstanding) | (Accounts Payable / COGS) x 365 | How long the company takes to pay suppliers |
Interpretation:
CCC benchmarks by industry:
| Industry | Typical CCC | DSO | DIO | DPO |
|---|---|---|---|---|
| Retail (grocery) | -10 to +5 days | 3-5 | 20-30 | 30-45 |
| Technology (software) | 30-60 days | 40-70 | 0-10 | 30-50 |
| Manufacturing | 40-90 days | 40-60 | 50-80 | 40-60 |
| Construction | 60-120 days | 60-90 | 20-40 | 40-60 |
| Pharma/Healthcare | 80-150 days | 50-70 | 80-120 | 40-60 |
Credit policy components:
DSO reduction levers:
Early payment discount economics:
Annualized cost of discount = (Discount% / (100% - Discount%)) x (365 / (Full term - Discount period))
Example: 2/10 Net 30 = (2/98) x (365/20) = 37.2% annualized
If company's cost of capital < discount cost, it is cheaper to borrow and pay early.
Inventory categories:
DIO reduction levers:
Economic Order Quantity (EOQ):
EOQ = sqrt(2 x D x S / H)
Safety stock calculation:
Safety stock = z x sigma_d x sqrt(L) + z x d_avg x sigma_L
DPO management principles:
DPO extension levers:
Ethical considerations:
Reverse factoring (approved payables finance):
Supplier ships goods → Buyer approves invoice → Bank pays supplier early (at discount)
→ Buyer pays bank at extended maturity
Factoring (receivables finance):
Other SCF instruments:
Primary metrics (monthly tracking):
Secondary metrics:
Cash freed by 1 day CCC improvement = Annual Revenue / 365
Example:
Revenue: € 500M
Current CCC: 65 days
Target CCC: 55 days (10-day improvement)
Cash freed: € 500M / 365 x 10 = € 13.7M
At a WACC of 8%, the annual value of freeing € 13.7M = € 1.1M.
Aging Bucket Amount (€) % of Total # Invoices Action
Current (0-30) _________ ____% _____ Monitor
31-60 days _________ ____% _____ Reminder
61-90 days _________ ____% _____ Escalation
91-120 days _________ ____% _____ Collection
>120 days _________ ____% _____ Write-down review
Total AR _________ 100% _____
Period: _______________ Company: _______________
Q-4 Q-3 Q-2 Q-1 Current Target
DSO (days) ____ ____ ____ ____ ____ ____
DIO (days) ____ ____ ____ ____ ____ ____
DPO (days) ____ ____ ____ ____ ____ ____
CCC (days) ____ ____ ____ ____ ____ ____
Net Working Capital (€m)
Accounts Receivable ____ ____ ____ ____ ____
Inventory ____ ____ ____ ____ ____
Accounts Payable (____ (____ (____ (____ (____
Net WC ____ ____ ____ ____ ____
NWC / Revenue ____% ____% ____% ____% ____%
Cash freed vs prior Q: € ____________
Annualized value at WACC: € ____________
Program type: [ ] Reverse factoring [ ] Factoring [ ] Dynamic discounting
Eligible volume: € ____________ / year
Expected participation: ____________%
Active volume: € ____________ / year
Buyer perspective:
DPO extension (days): ____________
Cash freed: € ____________
Annual benefit at WACC: € ____________
Program cost: € ____________ / year
Net benefit: € ____________ / year
Supplier perspective:
Days paid earlier: ____________
Discount rate (annualized): ____________%
Cost vs. own financing: ____________% savings
Accounting treatment:
[ ] Trade payable (on-balance)
[ ] Bank borrowing (reclassification risk)
Rationale: _______________