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nism-series-xv-cash-conversion-cycle-ccc-working-capital-formula[ RESEARCH ANALYST ]

A manufacturing company maintains Days Inventory Outstanding (DIO) of 65 days, Days Sales Outstanding (DSO) of 45 days, and Days Payables Outstanding (DPO) of 40 days. What is the firm's Cash Conversion Cycle (CCC)?

[ A ]150 Days (Summing all three metrics: 65 + 45 + 40)

[ B ]20 Days (DIO - DSO - DPO)

[ C ]110 Days (DIO + DSO without subtracting payables)

[ D ]70 Days [ DIO + DSO - DPO = 65 + 45 - 40 ][ CORRECT ]

Takeaway

Option D is correct: 70 Days [ DIO + DSO - DPO = 65 + 45 - 40 ]

Derivation

The Operating Cycle first captures how long cash is tied up before it's collected: Days Inventory Outstanding (65 days, time goods sit before selling) plus Days Sales Outstanding (45 days, time before customers actually pay) = 110 days. But the firm isn't funding all of that with its own cash — Days Payables Outstanding (40 days) represents supplier credit effectively financing part of that gap, so it's subtracted rather than added: CCC = 110 − 40 = 70 Days. A shorter CCC signals the firm converts investment in inventory and receivables back into cash faster, which frees up working capital for other uses; stretching supplier payment terms (raising DPO) is one deliberate lever managers pull to shrink this cycle without changing operating performance at all.

Why the others fail

A — 150 Days (Summing all three metrics: 65 + 45 + 40)

Adds Days Payables Outstanding instead of subtracting it, ignoring that supplier credit reduces, rather than adds to, the cash the firm must fund itself.

B — 20 Days (DIO - DSO - DPO)

Subtracts Days Sales Outstanding from Days Inventory Outstanding, which is not the correct CCC formula; DSO should be added, and DPO subtracted instead.

C — 110 Days (DIO + DSO without subtracting payables)

Sums Inventory and Receivable days but omits subtracting the 40 days of Payables Outstanding, overstating how long the firm's own cash is actually tied up.