DSO, DPO and DIO Explained

DSO, DPO, and DIO turn working capital balances into days, which makes them comparable across periods and companies. Days sales outstanding measures how long customers take to pay. Days payable outstanding measures how long the company takes to pay suppliers. Days inventory outstanding measures how long inventory sits before it sells. Together they describe the speed of the operating cycle.

Definition and the formulas

Days sales outstanding is DSO = Accounts Receivable / Revenue * 365. A lower number means faster collection. Days payable outstanding is DPO = Accounts Payable / Cost of Goods Sold * 365, where a higher number means the company holds onto cash longer by paying suppliers slowly.

Days inventory outstanding is DIO = Inventory / Cost of Goods Sold * 365. A lower number means inventory turns quickly. Note that DSO uses revenue while DPO and DIO use cost of goods sold, since payables and inventory are cost driven.

Worked example in Excel

Revenue is 3,650, cost of goods sold is 2,190, receivables are 400, payables are 300, and inventory are 360. Put revenue in B2 and cost of goods sold in B3.

1. DSO: =400/B2*365 returns 40 days.
2. DPO: =300/B3*365 returns 50 days.
3. DIO: =360/B3*365 returns 60 days.
4. Read together, the firm collects in 40, holds inventory 60, and pays in 50 days.

=400/3650*365 returns 40, the days sales outstanding.

Why it matters

These three metrics are the engine of a working capital forecast. Modelers project receivables, payables, and inventory by holding the day count constant and scaling the balance with revenue or cost, so the working capital lines grow sensibly with the business.

Each metric also flags operational health. A rising DSO can mean weak collections or strained customers. A falling DIO can mean efficient inventory management or, less happily, stockouts. A rising DPO improves cash but can strain supplier relationships.

• DSO: how fast you collect from customers.
• DPO: how slowly you pay suppliers, a cash lever.
• DIO: how quickly inventory converts to sales.

Nuances and mistakes

Mixing the denominators is the most common error. DSO must use revenue, while DPO and DIO must use cost of goods sold. Using revenue for inventory days, for instance, understates the figure and breaks comparability.

For seasonal businesses, a year-end snapshot can distort the ratio. Using an average of opening and closing balances, or a trailing measure, gives a steadier read. Also confirm whether the convention is 365 or 360 days, since some industries standardize on 360.