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Anonymous Finance Director / Controller

Cash Conversion Cycle Analysis DPO vs DSO vs DIO

Asked on June 14, 2016

Working on some cash conversion analyses for our board and management and the methods one can use to calc DSO/DIO/DPO are varied. I have seen DPO calcs done using purchasing while others use Cogs. I have seen DIO calcs done using sales while others use Cogs. Appreciate thoughts on when using purchasing or sales better informs management decisions and depicts the business performance better.

Answers

Anonymous's headshot
Anonymous Finance Director / Controller • June 8, 2016

Also, is it better to base the DPO metric purely on inventory purchasing if you are an an inventory business vs. including other purchasing?

Bob Leonard's headshot
Bob Leonard President • June 10, 2016

These are good questions and it is a reminder of how inaccurate or distorted these metrics can be. I think that COGS is better than sales for both metrics as it eliminates the distortion caused by the margin component, which is truly unrelated to either DPO or DIO.

I have been working to help develop an application that measures True Days.

comment-icon 1
Sarah Jackson's headshot
Sarah Jackson Associate Editor • June 16, 2016

Regardless of what system of analysis is used to look at results, having a better invoice-to-cash process is crucial. Check out this free whitepaper:

"Invoice-to-Cash Health Assessment Checklist"
https://www.proformative.com/whitepapers/your-invoice-cash-health-assessment-checklist

Best... Sarah

Terry Hartmann 's headshot
Terry Hartmann Director of Finance • June 17, 2016

"It depends" is always a safe response. What are you trying to portray / improve? If inventory management then use COGS. If overall terms to suppliers (all, excluding salaries) then use total spending less labor. If providing a general message on Cash Conversion Cycle to general management, then use Revenue in all cases. Each element is "incorrect", but the addition/subtraction is more intuitive and the overall message can be powerful, especially if measured and reported consistently over multiple years.

Bob Gold's headshot
Bob Gold Chief Financial Officer • June 19, 2016

I agree with Terry that using COGS is best for inventory (DIO) and excluding labor/salaries for DPO. We include SGA non "people related" spending as these can be high and are negotiable (i.e. Legal, Accounting, etc). None of these measures are perfect...but I believe the do reflect the cash conversion cycle...but you also need to be aware of what's going on in your business. Are you growing (investing in inventory at a faster or slower rate)? Increasing your purchases with a vendor who gives you 30 days terms or less? Is you business down and A/R will look like it's performing better as you focus on collecting past due.

The important perspective here is consistency and good analysis so you can guide your business and make recommendations based on the fluctuations in these metrics.

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