Working capital cycle: DSO + DIO minus DPO
The cash conversion cycle is the number of days a business funds itself between paying suppliers and being paid by customers. This page calculates it for three UK sector profiles (manufacturing, retail, services) and shows how a positive vs negative cycle drives working-capital finance needs and product choice.
The maths in plain English
Three inputs from your last filed accounts or management accounts:
- DSO = (accounts receivable / annual credit sales) x 365
- DIO = (inventory / cost of goods sold) x 365
- DPO = (accounts payable / annual purchases) x 365
Cash conversion cycle = DSO + DIO minus DPO. Result in days.
To convert days into a working-capital pound figure: cycle days x (annual revenue / 365). A 60-day cycle on £1m revenue ties up £164,384.
Worked example 1: manufacturing
Mid-size manufacturer, £1.2m turnover, B2B trade.
- Accounts receivable £150,000, annual credit sales £1.2m → DSO = 46 days
- Inventory £200,000, COGS £700,000 → DIO = 104 days
- Accounts payable £80,000, annual purchases £700,000 → DPO = 42 days
- Cash conversion cycle = 46 + 104 minus 42 = 108 days
- Working capital tied up = 108 x (£1,200,000 / 365) = approximately £355,000
Product fit: primary route is invoice finance against the £150,000 receivables (releases ~£120,000 within 24 hours), supplemented by an asset-backed working capital line against inventory and plant. Manufacturing finance routes.
Worked example 2: retail (B2C with stock)
Independent retailer, £800,000 turnover, mix of card sales and account customers.
- Accounts receivable £20,000 (mostly card receivables), annual credit sales £800,000 → DSO = 9 days
- Inventory £120,000, COGS £480,000 → DIO = 91 days
- Accounts payable £60,000, annual purchases £480,000 → DPO = 46 days
- Cash conversion cycle = 9 + 91 minus 46 = 54 days
- Working capital tied up = 54 x (£800,000 / 365) = approximately £118,000
Product fit: short DSO and decent DPO but heavy stock. Inventory finance, asset-backed line against stock, or a seasonal MCA against card receipts. MCA route.
Worked example 3: services (B2B consultancy)
Professional services firm, £600,000 turnover, no inventory.
- Accounts receivable £75,000, annual credit sales £600,000 → DSO = 46 days
- Inventory: zero → DIO = 0 days
- Accounts payable £15,000, annual purchases £150,000 → DPO = 36 days
- Cash conversion cycle = 46 + 0 minus 36 = 10 days
- Working capital tied up = 10 x (£600,000 / 365) = approximately £16,400
Product fit: the cycle is short, the WC need modest. The right finance is not WC finance at all but growth funding (term loan for hires, R&D advance if applicable, asset finance for equipment).
Worked example 4: negative cycle (subscription / platform)
SaaS or platform business, £500,000 turnover, customers pay monthly upfront.
- Accounts receivable £10,000, annual credit sales £500,000 → DSO = 7 days
- Inventory: zero → DIO = 0 days
- Accounts payable £40,000, annual purchases £150,000 → DPO = 97 days
- Cash conversion cycle = 7 + 0 minus 97 = negative 90 days
Product fit: the business is generating working capital, not consuming it. Customers are funding the operation. WC finance is unnecessary and inappropriate. The right finance is growth capital: term loan, R&D advance, or equity.
Sector cycle benchmarks
| Sector | Typical cycle (days) | Primary finance route |
|---|---|---|
| Manufacturing | 90 to 130 | Invoice finance + asset-backed line |
| Construction | 60 to 120 (project-dependent) | Project-specific invoice finance + bridging |
| Retail (with stock) | 40 to 80 | Inventory finance / MCA against card flow |
| E-commerce (own stock) | 30 to 60 | MCA / e-commerce-specific revenue finance |
| B2B services | 10 to 50 | Selective invoice finance / term loan |
| Hospitality | 5 to 30 | MCA against card receipts |
| Subscription / SaaS | Negative 30 to negative 90 | Growth term loan / R&D advance |
| Profile | Turnover | DSO | DIO | DPO | Cycle (days) | Working capital tied up |
|---|---|---|---|---|---|---|
| Manufacturing (B2B) | £1.2m | 46 | 104 | 42 | 108 | approximately £355,000 |
| Retail (B2C with stock) | £800,000 | 9 | 91 | 46 | 54 | approximately £118,000 |
| Services (B2B consultancy) | £600,000 | 46 | 0 | 36 | 10 | approximately £16,400 |
| Subscription / platform | £500,000 | 7 | 0 | 97 | negative 90 | none (cycle generates cash) |
Source: FundBiz working capital cycle worked examples
Cash conversion cycle = DSO + DIO minus DPO. Working capital tied up = cycle days x (annual revenue / 365). Illustrative profiles, not your figures.
View as plain-text Markdown
### Worked examples: cash conversion cycle by business profile | Profile | Turnover | DSO | DIO | DPO | Cycle (days) | Working capital tied up | | --- | --- | --- | --- | --- | --- | --- | | Manufacturing (B2B) | £1.2m | 46 | 104 | 42 | 108 | approximately £355,000 | | Retail (B2C with stock) | £800,000 | 9 | 91 | 46 | 54 | approximately £118,000 | | Services (B2B consultancy) | £600,000 | 46 | 0 | 36 | 10 | approximately £16,400 | | Subscription / platform | £500,000 | 7 | 0 | 97 | negative 90 | none (cycle generates cash) | Source: FundBiz working capital cycle worked examples Cash conversion cycle = DSO + DIO minus DPO. Working capital tied up = cycle days x (annual revenue / 365). Illustrative profiles, not your figures.
“The cycle number is an average across the year and it hides seasonality. A retailer running 54 days on paper can spike well past 90 in the stock build before peak trading, which is exactly when the facility has to be sized. Model the worst month, not the annual average, and check which leg of the cycle is the binding constraint before you pick a product.”
FAQs
What is the cash conversion cycle?
The number of days between paying suppliers and receiving cash from customers for the same trading activity. Formula: DSO + DIO minus DPO. A positive number means the business funds the gap from working capital; a negative number means suppliers and customers fund the business.
What does DSO mean?
Days Sales Outstanding. Average days from invoice issue to customer payment. Calculated as (accounts receivable / annual credit sales) x 365. UK B2B average is around 35 to 45 days; some sectors (construction, public sector) extend past 60.
What does DIO mean?
Days Inventory Outstanding. Average days inventory is held before sale. Calculated as (inventory / cost of goods sold) x 365. Manufacturing typically 60 to 120 days; retail 30 to 60; services close to zero.
What does DPO mean?
Days Payable Outstanding. Average days from receiving a supplier invoice to paying it. Calculated as (accounts payable / annual purchases) x 365. UK SMB typically 30 to 45 days; longer DPO improves cash position but strains supplier relationships.
What is a negative cash conversion cycle?
Where DPO is greater than DSO + DIO. The business collects cash from customers before it has to pay suppliers. Common in subscription businesses (paid monthly upfront), some retailers (sell stock before paying for it), and platforms (take fees before paying providers). Working capital is generated, not consumed.
How does the cycle drive finance product choice?
Long DSO with B2B invoices means invoice finance. Long DIO with funded stock means asset-backed working capital line or trade finance. Short DPO with stretched suppliers means supplier payment finance. Negative cycle businesses rarely need working capital finance and are best served by growth term loans.
How do I shorten my cash conversion cycle?
Reduce DSO: invoice on completion not month-end, offer early-payment discounts, automate chasing. Reduce DIO: smaller more frequent buys, JIT, sell slow-moving stock at clearance. Increase DPO: negotiate net-60 with suppliers, take advantage of agreed payment terms (do not pay early without discount).
Is a long cycle always bad?
No. Long cycles are common in capital-intensive and project-based sectors. The question is whether the cycle is funded, not whether it is short. A construction business with a 90-day cycle is normal; the same business without a working-capital facility sized to cover 90 days is exposed.
Run the matcher
Tell us your sector, turnover and which leg of the cycle is the binding constraint (slow customers, heavy stock, stretched suppliers). We surface the panel lenders most likely to approve and the right product structure for the cycle profile.
Open working-capital matcher →By Oliver Mackman. Last reviewed 12 June 2026.