Working capital management: the cash conversion cycle, DSO, DIO and DPO, collections and Mahnwesen

What you will learn

• How to calculate days sales outstanding (DSO), days inventory outstanding (DIO) and days payables outstanding (DPO).
• How the cash conversion cycle (CCC) combines them and what one day is worth in euros.
• A collections process that works, and the German rules for default (Verzug), interest and the €40 lump sum.
• Practical rules for shortening the cycle without damaging customer relationships.

Explanation

Working capital is the money tied up between paying for inputs and being paid by customers (balance-sheet definition in "Stocks & Fundamental Analysis"). Three day-counts show where the cash sits:

• DSO (days sales outstanding) = trade receivables ÷ annual revenue × 365. The average number of days a customer takes to pay.
• DIO (days inventory outstanding) = inventory ÷ annual cost of goods sold (COGS) × 365. How long stock sits before it is sold.
• DPO (days payables outstanding) = trade payables ÷ annual COGS (or purchases) × 365. How long you take to pay suppliers.

The cash conversion cycle is CCC = DIO + DSO − DPO: the number of days your own cash finances the operation. A service business has DIO = 0; a supermarket that sells goods before paying for them has a negative cycle. One day of DSO ties up revenue ÷ 365 in cash; one day of DIO or DPO ties up COGS ÷ 365.

Reducing DSO is process, not luck: invoice on the day of delivery, state a calendar due date, offer direct debit (SEPA-Lastschrift) to small customers, check new business customers' creditworthiness, and follow a fixed dunning calendar. Reducing DIO means smaller, more frequent orders and clearing dead stock. Increasing DPO means negotiating terms openly, not paying late; giving up Skonto to stretch payables is usually the most expensive credit available (lesson 6).

Mahnwesen (dunning) under German law, as of 2026: a debtor is in Verzug (default) at the latest 30 days after the invoice is due and received (§ 286 BGB); for consumers only if the invoice said so. From default the creditor may charge statutory default interest (§ 288 BGB): Basiszinssatz + 9 percentage points between businesses, + 5 points towards consumers. The Basiszinssatz is reset every 1 January and 1 July; it was 1.52 percent from 1 July 2026, giving 10.52 percent for business debts; check the current value. Between businesses the creditor may additionally claim a €40 lump sum (§ 288 (5) BGB). If dunning fails, the gerichtliches Mahnverfahren (court payment order) gives an enforceable title cheaply without a full lawsuit. The practical calendar: friendly call at due date + 3 days, written reminder at + 14 days, final notice with interest and lump sum at + 30 days, then court order or a collection agency.

Worked example

Hypothetical example: a small wholesaler, annual revenue €1,200,000, COGS €720,000, trade receivables €180,000, inventory €90,000, trade payables €60,000. Taxes, VAT in the balances and seasonality are ignored.

DSO = €180,000 ÷ €1,200,000 × 365 = 54.75 days.

DIO = €90,000 ÷ €720,000 × 365 = 45.6 days.

DPO = €60,000 ÷ €720,000 × 365 = 30.4 days.

CCC = 45.6 + 54.75 − 30.4 = 70.0 days.

One day of revenue = €1,200,000 ÷ 365 = €3,288. If a tighter process brings DSO from 54.75 to 40 days, cash freed = (54.75 − 40) × €3,288 = €48,500 (rounded), permanently, without any new sales. If the company pays 10.52 percent on an overdraft, that is about €5,100 of interest saved per year (€48,500 × 0.1052).

Dunning on one invoice: a business customer owes €25,000, pays 45 days after default began, default rate 10.52 percent. Interest = €25,000 × 0.1052 × 45 ÷ 365 = €324.25, plus the €40 lump sum = €364.25 claimable. The real value of dunning is receiving the €25,000 sooner.

Common mistake

Practice activity

On paper: a service company has revenue €600,000, receivables €90,000, no inventory, payables €25,000 on annual purchases of €150,000. (a) Calculate DSO, DPO and CCC. (b) The owner wants to bring DSO to 35 days by offering direct debit and a strict dunning calendar. How much cash is freed? (c) A supplier offers to extend terms from 30 to 60 days in exchange for giving up a 2 percent Skonto. Using the annualised-cost logic from lesson 6, should the owner accept to lengthen DPO?

Key takeaways

• CCC = DIO + DSO − DPO; each day is worth about one day of revenue or COGS in cash.
• Faster invoicing, clear due dates, direct debit and a fixed dunning calendar lower DSO more than any software.
• German law: default after 30 days, interest at Basiszinssatz + 9 points (business) or + 5 (consumer), €40 lump sum between businesses; check current rates.
• Watch a weekly ageing list; the over-60 bucket predicts bad debts.

Next step

The fastest way to shorten the cycle is to design it into your prices and contracts; lesson 10 covers deposits, milestone billing and payment terms.