Question

A positive cash cycle is preferable to a negative cash cycle

Answer 1

Let’s have a look at the formula and then we will explain the formula in detail.

Cash Conversion cycle Formula= Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding (DPO)

Now let’s understand each of them.

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Step by Step Guide to Calculating Financial Ratios in excel

DIO stands for Days Inventory Outstanding. If we break days inventory outstanding further, we would need to divide inventory by cost of sales and multiply by 365 days.

Days Inventory Outstanding (DIO) = Inventory / Cost of Sales * 365

Days Inventory Outstanding signifies the total number of days taken for the company to convert the inventory into the finished product and complete the sales process. (also look at Inventory Valuation)

Later in the example section, we will take DIO and illustrate with an example.

DSO stands for Days Sales Outstanding. How would we calculate it? Here’s how. Take accounts receivable. Divide it by net credit sales. And then multiply by 365 days.