Cash Conversion Cycle: How Long Your Money Is Stuck

The cash conversion cycle is the number of days between paying for what you sell and getting paid for it. A business with a 75-day cycle has to finance 75 days of its own operations, every day, out of its own pocket or a bank’s.

It is computed from three numbers you already have in your balance sheet and profit and loss account, and it tells you something neither statement says on its own: where the cash is waiting.

The formula

Cash conversion cycle = DIO + DSO − DPO

• DIO, days inventory outstanding = inventory ÷ cost of goods sold × 365. How long stock sits before it is sold.
• DSO, days sales outstanding = trade receivables ÷ revenue × 365. How long customers take to pay.
• DPO, days payables outstanding = trade payables ÷ cost of goods sold × 365. How long you take to pay suppliers.

Stock and receivables are cash you have spent and not yet recovered. Payables are cash your suppliers have lent you, free, for as long as you hold it. The cycle nets the two.

A worked example

A distributor of electrical fittings closes the year with these figures:

Revenue of ₹3.65 crore is ₹1,00,000 a day. Cost of goods sold is ₹70,000 a day. That makes the arithmetic easy to follow.

• DIO = 42,00,000 ÷ 70,000 = 60 days
• DSO = 45,00,000 ÷ 1,00,000 = 45 days
• DPO = 21,00,000 ÷ 70,000 = 30 days

Cash conversion cycle = 60 + 45 − 30 = 75 days.

In rupees, the business has ₹42 lakh in stock plus ₹45 lakh with customers, less ₹21 lakh owed to suppliers: ₹66 lakh of working capital that someone has to fund. If that someone is an overdraft at 11%, the cycle costs about ₹7.3 lakh a year in interest before a single sale is made.

The day-rate shortcut works because both ratios use a full year of revenue or cost. If your business is seasonal, use average balances or compute the cycle quarter by quarter, because a March balance sheet can show a very different stock level from October.

What each lever is worth

The useful thing about the cycle is that every day has a price, and the price is different for each component.

A day of receivables is worth more than a day of stock or payables, because receivables sit at selling price and the other two sit at cost. In this business a day of DSO is worth ₹1,00,000 and a day of DIO or DPO is worth ₹70,000. That alone often decides where to start.

The lever that looks free and isn’t

Stretching supplier payments shortens the cycle on paper, and it is the most tempting lever because it needs nobody’s cooperation except the supplier’s patience. It carries two costs that do not appear in the formula.

The first is lost early-payment discounts. A supplier offering 2% for paying in 10 days instead of 30 is offering an annualised return of about 37%: 2 ÷ 98 × 365 ÷ 20. No overdraft is that expensive, so paying late to keep that cash is a poor trade.

The second is relationship cost. Suppliers who are paid slowly price that in, allocate scarce stock to other customers first, and stop extending credit when you most need it. The formula will not show it; your purchase prices eventually will.

If you buy from micro or small enterprises, check the payment terms you have agreed and your obligations under the MSMED framework before stretching anything. Section 15 of the MSMED Act, 2006 caps agreed credit at 45 days from acceptance (15 days where there is no written agreement), section 16 adds compound interest at three times the RBI bank rate on late amounts, and from tax year 2026-27 section 37(2)(g) of the Income-tax Act, 2025 allows a late payment to a micro or small supplier as a deduction only in the year it is actually paid. Delayed payment to MSME suppliers has consequences beyond goodwill; see what to do when a customer does not pay.

Where the days usually hide

DSO: a small number of customers usually accounts for most of the overdue balance. An ageing report sorted by amount, not by name, shows it in a minute. Invoicing late is the other quiet cause: an invoice raised a week after delivery adds a week to DSO without the customer doing anything wrong.

DIO: total days hide the real problem, which is usually slow-moving items. Twenty percent of SKUs often carry a disproportionate share of stock value. Computing DIO by product line, even roughly, points straight at them.

DPO: check whether you are paying early by accident. Businesses that pay on receipt of invoice when the agreed term is 45 days give away cash for nothing.

Reading your own number

There is no universal good cycle. A supermarket can run a negative one because customers pay instantly and suppliers are paid in weeks. A machine builder may run 150 days and be perfectly healthy if its pricing carries that financing cost.

What matters is the trend and the comparison with how you fund it. Three questions are worth asking every quarter:

1. Is the cycle longer than last year, and which of the three components moved?
2. Is revenue growing? A growing business with a fixed cycle needs more working capital every year, which is why profitable growth can still drain the bank account.
3. Is the working capital funded by long-term money or by an overdraft that the bank can reduce at renewal?

The second question is the one owners miss. Grow sales by 20% with the same 75-day cycle and the ₹66 lakh becomes roughly ₹79 lakh. That extra ₹13 lakh has to come from somewhere before the extra profit arrives.

Where this fits

• Sizing the funding requirement: how much working capital a business needs
• Run your own figures: working capital calculator · cash flow calculator
• When customers stop paying altogether: what to do when a customer is not paying
• The profit-cash gap explained: profitable but no cash in the bank