Turning three balance-sheet lines into days
The three working-capital line items, translated to days. Accounts receivable becomes Days Sales Outstanding (DSO): receivables divided by daily revenue. Inventory becomes Days Inventory Outstanding (DIO): inventory divided by daily cost of goods sold. Accounts payable becomes Days Payable Outstanding (DPO): payables divided by daily cost of goods sold. The dollar amounts on the balance sheet are nearly meaningless without their day-equivalents — a 200M receivable balance is wonderful for a $4B revenue business (18 days) and alarming for a $400M one (180 days).
The cash conversion cycle formula
CCC = DIO + DSO - DPO
The Cash Conversion Cycle is the number of days that elapse between paying a supplier for raw inputs and collecting cash from a customer for the finished good. A grocery chain that sells inventory in 20 days, collects in 1 day, and pays suppliers in 35 days has a CCC of MINUS 14 days — suppliers are effectively financing the working capital. A heavy-equipment manufacturer with 90-day inventory, 70-day collections, and 45-day payables runs a CCC of 115 days — that is the cash the business permanently has trapped in the operating cycle, scaling linearly with revenue.
Working-capital moves: feature or flag?
| Move | Likely feature | Likely flag |
|---|---|---|
| Receivables grow faster than revenue | New large-customer contract with longer payment terms | Channel stuffing or customer credit deterioration |
| Inventory days rise sharply | Pre-build for a known launch or seasonal peak | Demand slowdown the income statement has not yet booked |
| Payables stretch by 20+ days | Supplier negotiation moat (the Costco / Walmart pattern) | Cash crunch — paying suppliers late because cash is tight |
| CCC swings negative | Pricing power — customers prepay or suppliers absorb the float | Rare; usually a feature when it happens |
Operating vs total working capital
Operating working capital vs total working capital. Total working capital (current assets minus current liabilities) sweeps in cash, short-term debt, and other treasury items that have nothing to do with operations — moves in those line items are financing decisions, not operating signals. Operating working capital strips both sides: it sums only the operating current assets (receivables + inventory + prepaid expenses) minus the operating current liabilities (payables + accrued expenses). The operating cut is the right diagnostic for how much cash the business itself ties up; the total cut is for liquidity-coverage questions.
Compute the cash cycle for a real company
A profitable business can still run out of cash
Sit with the ideas.
Northwind Components reports the following for fiscal year 2026: revenue $1.46B, cost of goods sold $876M, accounts receivable $240M, inventory $144M, accounts payable $108M. Working from these figures, what is Northwind's Cash Conversion Cycle, and what does it tell you about the cash trapped inside the operating cycle?