The formula
The cash conversion cycle is how many days your cash is tied up between paying for stock and getting paid by customers. Days inventory outstanding is average inventory divided by cost of goods sold, times 365. Days sales outstanding is average receivables divided by net credit sales, times 365. Days payable outstanding is average payables divided by cost of goods sold, times 365. The cycle is the first leg plus the second, minus the third. A cycle of 79.08 days means cash is tied up for 79.08 days between paying for stock and collecting from customers.
Step 1 — Find the average inventory and cost of goods sold
Start with the average inventory, from the balance sheet. Average inventory is (opening inventory + closing inventory) ÷ 2. Then find the cost of goods sold, from the income statement. The inventory leg uses ONLY the cost of goods sold — never revenue, because revenue is what you sell, not what the stock cost you. On the worked example the average inventory is $150,000.00 and the cost of goods sold is $900,000.00.
Step 2 — Work out the days inventory outstanding
Divide the average inventory by the cost of goods sold, then multiply by 365: how many days the stock on hand lasts at the current selling rate. On the worked example it is $150,000.00 ÷ $900,000.00 × 365 = 60.83 days. That is the first leg: cash sits in stock for 60.83 days before the stock is sold.
Step 3 — Find the average receivables and net credit sales
Now find the average receivables, from the balance sheet. Average receivables is (opening receivables + closing receivables) ÷ 2. Then find the net credit sales, from the income statement. The receivables leg uses net credit sales ONLY — never total revenue, because cash sales are already collected. On the worked example the average receivables are $300,000.00 and the net credit sales are $1,200,000.00.
Step 4 — Work out the days sales outstanding
Divide the average receivables by the net credit sales, then multiply by 365: how long, on average, a dollar of credit sales waits before the customer pays it. On the worked example it is $300,000.00 ÷ $1,200,000.00 × 365 = 91.25 days. That is the second leg: cash sits in unpaid invoices for 91.25 days after the stock is sold.
Step 5 — Work out the days payable outstanding
Now find the average payables, from the balance sheet. Average payables is (opening payables + closing payables) ÷ 2. Divide by the cost of goods sold, then multiply by 365. The payables leg uses ONLY the cost of goods sold — never revenue, because revenue is what you sell, not what you owe. On the worked example the average payables are $180,000.00, so it is $180,000.00 ÷ $900,000.00 × 365 = 73.00 days. That is the third leg: supplier credit covers 73.00 days of the wait.
Step 6 — Add the first two legs and subtract the third
Add the first two legs, then subtract the third. On the worked example it is 60.83 + 91.25 − 73.00 = 79.08 days. That is the cash conversion cycle: your cash is tied up for 79.08 days. The operating cycle is 60.83 + 91.25 = 152.08 days, and the cash conversion cycle is the operating cycle minus days payable: 152.08 − 73.00 = 79.08 days.
Step 7 — Check the result
Retail often runs 30 to 60 days, manufacturing 60 to 120 days, construction longer. On the worked example the cycle is 79.08 days, so the business sits inside the manufacturing line. A cycle near zero or even negative means customers pay before suppliers are paid.
Three worked examples
The headline example: $150,000.00 of average inventory, $900,000.00 of cost of goods sold, $300,000.00 of average receivables, $1,200,000.00 of net credit sales and $180,000.00 of average payables. The days inventory outstanding is 60.83 days, the days sales outstanding is 91.25 days, the days payable outstanding is 73.00 days, and the cash conversion cycle is 60.83 + 91.25 − 73.00 = 79.08 days. The target example: how much stock must the business hold for a 100.00-day cycle. The average inventory needed is (100.00 − 91.25 + 73.00) × $900,000.00 ÷ 365 = $201,575.34. The reverse example: the smallest whole-dollar inventory for a 100.00-day cycle. It is $201,576; at $201,575 the inventory is $1 short of the $201,576 needed, with an unrounded cycle of 99.999861. Use the cash conversion cycle calculator for your own numbers.
One reverse to check your answer
The smallest whole-dollar average inventory for the CCC to reach 100.00 days is $201,576 — at $201,576 the cycle is 100.00 days (unrounded 100.000267); at $201,575 the inventory is $1 short of the $201,576 needed, with an unrounded cycle of 99.999861, which displays as 100.00 days after rounding. The average inventory needed for a 100.00-day cycle is $201,575.34.
What average inventory is, and why it is an average
Average inventory is (opening inventory + closing inventory) ÷ 2: the stock at the start plus the stock at the end, divided by two. A single snapshot misleads: a business that stocks up in December and sells through in January shows huge inventory in December and small inventory in February. The average is steadier, because stock levels swing through the year. The same averaging idea applies to receivables and payables: use (opening + closing) ÷ 2 for all three legs.
What a high cycle means — and what a low cycle means
A high cycle means cash is tied up in stock and unpaid invoices, and the business usually needs more working capital. A low cycle means cash comes back fast, and the business needs less working capital. A cycle near zero or even negative is the best of all — customers pay before suppliers are paid — but a cycle that is too short can mean stockouts, rushed orders and strained suppliers. The goal is a healthy cycle, not the shortest possible one.
What to do when the cycle is long
A 79.08-day cycle means each dollar of costs takes about two and a half months to come back as cash. Shorten it by attacking the longest leg first: on the worked example the days sales outstanding is 91.25 days, longer than the 60.83 days in stock, so collecting from customers faster is the quickest win. Tighten credit terms, offer early-payment discounts, and chase overdue invoices weekly instead of monthly. Then look at the stock leg: order just in time and clear slow-moving stock. Then look at the payables leg: negotiate longer payment terms with key suppliers.
How the cycle differs from its three legs
Days sales outstanding is one leg: it tests how fast customers pay you, and 91.25 days on the worked example. Days payable outstanding is another leg: it tests how fast you pay suppliers, and 73.00 days on the worked example. Inventory turnover is the stock leg in different units: it tests how many times a year the stock sells through. The cash conversion cycle is the whole picture: all three legs together. See the days sales outstanding calculator and the guide to calculating days sales outstanding, and the guide to calculating inventory turnover.