The financial ratio calculated as days inventory outstanding plus days sales outstanding minus days payables outstanding is the cash conversion cycle (CCC). It estimates how many days a company’s cash is tied up between paying suppliers and collecting cash from customers.
Days inventory outstanding measures the time inventory remains before sale. Days sales outstanding estimates how long receivables take to become cash. Days payables outstanding measures how long the company takes to pay suppliers. Adding the first two periods and subtracting the third produces the cash conversion cycle.
A shorter CCC generally indicates that working capital is being recovered more quickly. A negative CCC is possible when a company collects from customers before it pays suppliers, a model associated with some powerful retailers and subscription businesses. However, aggressively delaying payments or tightening customer credit can create operational or relationship risks.
The operating cycle is a close neighbour but is not identical: it equals inventory days plus receivables days and does not subtract payables days. Inventory turnover is also different, because it is a rate rather than a days-based cash-timing measure.