Working Capital Optimization: Days Sales Outstanding (DSO), DPO & Cash Conversion Cycle Acceleration

## Working Capital Liquidity and the Cash Conversion Cycle

The Cash Conversion Cycle (CCC) measures the duration in days required for a company to convert cash invested in operations (raw materials and inventory) back into cash inflows from sales.

### 1. The Core CCC Formulation

$$\text{CCC} = \text{DIO} + \text{DSO} - \text{DPO}$$

Where:
- **Days Inventory Outstanding (DIO)**:
$$\text{DIO} = \frac{\text{Average Inventory}}{\text{Cost of Goods Sold (COGS)}} \times 365$$
- **Days Sales Outstanding (DSO)**:
$$\text{DSO} = \frac{\text{Average Accounts Receivable}}{\text{Total Credit Sales}} \times 365$$
- **Days Payable Outstanding (DPO)**:
$$\text{DPO} = \frac{\text{Average Accounts Payable}}{\text{COGS}} \times 365$$

### 2. The True APR of Supplier Early Payment Discounts (2/10 Net 30)

$$\text{Effective Annual Rate (EAR)} = \left( 1 + \frac{\text{Discount \%}}{100 - \text{Discount \%}} \right)^{\frac{365}{\text{Total Days} - \text{Discount Days}}} - 1$$

For standard terms offering 2% off if paid in 10 days rather than 30:

$$\text{EAR} = \left( 1 + \frac{2}{98} \right)^{\frac{365}{20}} - 1 = (1.0204)^{18.25} - 1 = 44.6\% \text{ compounded APR}$$

Treasury teams should draw on revolving credit lines at 7.5% APR to capture every available 2/10 vendor discount, earning a guaranteed risk-free spread.