What does Days In Inventory (DIO) represent in the cash conversion cycle?

What does Days In Inventory (DIO) represent in the cash conversion cycle?

• A. Time to collect receivables
• B. Time inventory sits before being used on projects
• C. Time from order to payment
• D. Time to pay suppliers

Answer: (B)

DIO represents the length of time inventory sits on hand before it’s used or sold. In the cash conversion cycle, it shows how long cash is tied up in inventory as that stock moves through production or stays idle until it’s consumed. A higher DIO means inventory remains in stock longer, delaying cash conversion, while a lower DIO means inventory turns over more quickly and cash is freed sooner. DIO is typically calculated as average inventory divided by the cost of goods sold per day (often written as: DIO ≈ (Average Inventory / COGS) × 365). This is distinct from the time it takes to collect receivables (days sales outstanding) and the time taken to pay suppliers (days payable outstanding), which relate to other parts of the cash conversion cycle rather than inventory holding.

DIO represents the length of time inventory sits on hand before it’s used or sold. In the cash conversion cycle, it shows how long cash is tied up in inventory as that stock moves through production or stays idle until it’s consumed. A higher DIO means inventory remains in stock longer, delaying cash conversion, while a lower DIO means inventory turns over more quickly and cash is freed sooner. DIO is typically calculated as average inventory divided by the cost of goods sold per day (often written as: DIO ≈ (Average Inventory / COGS) × 365). This is distinct from the time it takes to collect receivables (days sales outstanding) and the time taken to pay suppliers (days payable outstanding), which relate to other parts of the cash conversion cycle rather than inventory holding.