Cash Conversion Cycle

DSO measures how quickly a company collects payment from customers after making a sale. DIO measures how long inventory sits before being sold. DPO measures how long a company takes to pay its suppliers. Together, DSO + DIO represents the operating cycle (time from inventory purchase to cash collection), and subtracting DPO accounts for the fact that suppliers effectively finance part of that cycle.

A lower or even negative CCC means the company collects cash quickly and delays payments to suppliers, minimizing the cash tied up in operations. Amazon famously operates with a negative CCC because it collects from customers before paying suppliers. A rising CCC over time may signal deteriorating collections, inventory buildup, or loss of leverage with suppliers. Comparing CCC across peers reveals which companies manage working capital most effectively.

Changes in working capital directly affect operating cash flow and therefore free cash flow. A declining CCC means the company is freeing up cash from operations, which boosts FCF even without revenue growth. Conversely, a rising CCC consumes cash as more capital gets trapped in accounts receivable and inventory. In financial models, accurately projecting DSO, DIO, and DPO is essential for forecasting free cash flow and valuation.