DSO, DPO and DIO, explained simply
Together they describe the working capital cycle: cash goes out for inventory, the inventory is held, a customer buys on credit and later pays. The longer the cycle, the more cash is tied up.
Movements in these measures explain working capital trends, support the peg and reveal strain on customers or suppliers.
Working capital days, FY2024 and FY2025
IllustrativeAlder Creek Manufacturing, days
The cash conversion cycle lengthened by 16 days, almost entirely from slower customer collections.
Formulas
- DSO = accounts receivable ÷ revenue × 365
- DIO = inventory ÷ cost of goods sold × 365
- DPO = accounts payable ÷ cost of goods sold × 365
- Cash conversion cycle = DSO + DIO − DPO
Worked example
| Alder Creek | FY2024 | FY2025 |
|---|---|---|
| DSO | 45 days | 62 days |
| DIO | 67 days | 65 days |
| DPO | 43 days | 42 days |
| Cash conversion cycle | 69 days | 85 days |
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Diligence links the longer DSO to extended payment terms offered to win new customers.
Why it matters in a deal
Changes in these measures explain movements in working capital, support or challenge the peg, and reveal pressure on customers and suppliers.
Red flags
- DSO rising as sales grow
- DPO rising sharply before a sale as suppliers are paid late to retain cash
- DIO rising, which may indicate slow-moving or obsolete stock