Cash & runway
Cash conversion cycle: DSO + DIO − DPO
How many days your cash is tied up between paying for what you sell and collecting for it, and what a day off the cycle is worth.
How many days your cash is tied up between paying for what you sell and collecting for it, and what a day off the cycle is worth.
DSO and DIO use the same period; DIO and DPO are both computed against cost of goods sold, not revenue, because inventory and supplier bills are carried at cost. A software business with no inventory has a DIO of zero and the cycle collapses to DSO minus DPO.
The cash conversion cycle is the number of days between paying for what you sell and collecting the cash for it. CCC = DSO + DIO − DPO. A shorter cycle means the business funds itself; a longer one means it needs working capital to stand still. Its three inputs each have their own page: days sales outstanding, days inventory outstanding, and days payable outstanding.
It is the one metric that ties the three operating levers together, which is also why it is more useful than any of them alone. A company can be proud of its collections and still have a terrible cycle because stock sits for four months.
| Leg | What it measures | Formula |
|---|---|---|
| DSO — days sales outstanding | How long customers take to pay | (Accounts receivable ÷ Revenue) × Days |
| DIO — days inventory outstanding | How long stock sits before selling | (Inventory ÷ COGS) × Days |
| DPO — days payable outstanding | How long you take to pay suppliers | (Accounts payable ÷ COGS) × Days |
Note that DIO and DPO run against cost of goods sold, not revenue. Inventory and supplier bills are both carried at cost, so using revenue in either denominator understates the days. DSO runs against revenue, because that is what receivables are measured in.
If you collect before you pay, the cycle goes negative and your customers and suppliers fund your trading. Subscription businesses that bill annually up front frequently run there. So do retailers with fast stock turns and long supplier terms.
A negative number in the calculator above is not a mistake. It means the trading cycle releases cash as it grows, which is the strongest position on this metric and one of the few ways to grow quickly without raising.
Look at the three numbers separately before acting. They are not equally movable.
The calculator prints revenue per day, because that is what one day off the cycle releases. At $2.4M of annual revenue, a day is about $6,600 and five days is $33,000 — released once, permanently, without dilution or a lender. That is the honest framing: it is a one-time working-capital gain rather than recurring revenue, but it arrives faster and cheaper than any other source of cash.
All three legs come out of the ledger, which means they are only as current as the close. We keep receivables, payables and inventory reconciled continuously rather than in a month-end scramble — see AR and AP management and bookkeeping.