The best way to calculate the DIO, DSO and DPO is to break the formulas down into three clear steps.
For example, to find DIO:
The first step is to find the average inventory which is:
Beginning Inventory + Ending inventory then divide your result by 2.
The second step is to find the cost of goods sold per day which is:
Cost of Goods sold divided by 365.
The third step is to calculate the DIO which is:
Average Inventory divided by cost of goods sold per day.
You will be applying the same three-step format (not formula) as above to calculate the DSO and DPO.
Remember that the Cash Conversion Cycle = DIO + DSO – DPO.
Let's go through an example.
You have been provided with the following data in respect of payables, receivables, sales, and cost of sales for Sarah's Limited for the year ended 31 December 2017.
The DIO is:
1. (11,000 + 12,000)/2 = 11,500
2. 130,000/365 = 356.2
3. 11,500/356.2 = 32.29 days
The DSO is:
1. (12,450 + 12,950)/2 = 12,700
2. 300,000/365 = 821.92
3. 12,700/891.92 = 14.24 days
The DPO is:
1. (11,700 + 20,500)/2 = 16,000
2. 130,000/365 = 356.2
3. 16,000/356.2 = 44.92 days
Cash Conversion Cycle:
32.29 + 14.24 - 44.92 = 1.61 days