Introduction
Costco sold $269.9 billion of goods in its fiscal year ended August 2025, and at year end it owed its suppliers $19.8 billion while holding $18.1 billion of inventory. Its suppliers, in other words, were financing all of Costco's stock and more. Customers pay at the till, so receivables were tiny; inventory turned over in about four weeks; and Costco paid suppliers in about the same time. The result is a business that needs almost no cash tied up in its operations as it grows.
Three ratios capture that picture: days sales outstanding (DSO), days inventory outstanding (DIO) and days payables outstanding (DPO). Each expresses a working capital balance as a number of days of sales or costs, which makes balances comparable across companies of different sizes and makes forecasting simple: if a company's days stay constant, its working capital grows in line with its business. How the balances themselves move cash is covered in working capital on the cash flow statement.
The Three Days Metrics
Each metric divides a balance by the related income statement line and converts it into days:
- Days sales outstanding (DSO)
The average number of days it takes a company to collect payment after a sale, calculated as accounts receivable divided by revenue, multiplied by the number of days in the period. A rising DSO means customers are paying more slowly or credit terms have lengthened.
DIO measures how long inventory sits before it is sold, and DPO how long the company takes to pay its suppliers. DSO uses revenue because receivables are recorded at selling prices; DIO and DPO use cost of goods sold because inventory and payables are recorded at cost. Analysts use either year-end balances, which reflect the latest position, or averages of opening and closing balances, which better match a full year's flows. Whichever convention is chosen, it should be applied consistently across companies and years.
The Cash Conversion Cycle
Combining the three gives the cash conversion cycle, the number of days between paying suppliers for inventory and collecting cash from customers for the goods made from it:
- Cash conversion cycle
The number of days a company's cash is tied up in operations, from paying for inventory to collecting from customers, calculated as DSO plus DIO minus DPO. A negative cycle means suppliers are paid after customers have paid, so suppliers finance the business.
A long cycle means the company funds its customers and its stock for weeks or months, and every increase in sales absorbs cash. A short or negative cycle means operations largely fund themselves, and growth can even release cash. The blog's guide to the cash conversion cycle explores how different business models arrive at their cycles.
Two Retailers Compared
Costco's fiscal 2025 annual report and Target's fiscal 2025 annual report show how two large retailers with similar cycles get there in different ways:
| Line item | Costco | Target |
|---|---|---|
| Revenue | 275,235 | 104,780 |
| Cost of goods sold | 239,886 | 75,511 |
| Receivables | 3,203 | 1,807 |
| Inventory | 18,116 | 12,304 |
| Accounts payable | 19,783 | 12,622 |
| Days sales outstanding | 4.2 | 6.3 |
| Days inventory outstanding | 27.6 | 59.5 |
| Days payables outstanding | 30.1 | 61.0 |
| Cash conversion cycle, days | 1.7 | 4.8 |
Sources: Costco and Target fiscal 2025 Forms 10-K, year-end balances. Costco's revenue includes membership fees and its cost of goods sold is merchandise costs. Target reports receivables inside other current assets; its figure combines accounts and other receivables (1,265) and vendor income receivable (542), matching Costco's receivables line, which also includes vendor receivables.
Both retailers run cycles close to zero, so suppliers fund almost all of their inventory. The difference lies in the components. Costco sells a limited range of high-volume items and turns its inventory in about four weeks; Target carries a broader assortment and holds inventory about twice as long, about 59 days. Target matches that by paying its suppliers in about 61 days, twice Costco's 30. Costco's model needs less stock and less supplier credit for each dollar of sales, and its membership fees, collected in advance, add a further source of funding that sits in deferred revenue rather than in these ratios.
Turnover Ratios: The Same Information Inverted
Some analysts express the same balances as turnover ratios: inventory turnover is cost of goods sold divided by inventory, and receivables turnover is revenue divided by receivables. Turnover is simply 365 divided by days. Costco's inventory turned about 13 times in fiscal 2025, roughly every 28 days; Target's turned about six times, roughly every 59 days. The two presentations carry identical information, and the choice between them is a matter of convention, though days are easier to use in forecasts because they translate directly into balances.
Using Days to Forecast Working Capital
In a projection model, days are the standard driver of working capital. The analyst assumes a number of days for each balance, often based on recent history, and calculates the balance from projected revenue or cost of goods sold:
The change in each projected balance then flows to the cash flow statement. If revenue grows 10% and days stay constant, receivables, inventory and payables all grow 10%, and the net investment in working capital grows by 10% of its starting level. A shift of a few days can move a single year's free cash flow as much as a point of margin, so days assumptions deserve as much scrutiny as margin assumptions. The cash flow mechanics are traced in receivables, payables and accruals on the statements.
Drivers for the Other Working Capital Lines
The three days metrics cover the largest balances, but a full forecast drives the rest too. Accrued expenses are usually projected as a percentage of operating expenses, and deferred revenue as a percentage of revenue or in days of revenue, which matters greatly for subscription businesses. Contractors add contract assets to receivables, since much of their earned revenue sits there before it can be billed. Manufacturers sometimes split inventory days into raw materials, work in progress and finished goods, because each responds differently to changes in production. The aim in every case is the same: tie each balance to the activity that generates it, so that the forecast grows working capital with the business rather than holding it flat or letting it drift.
Seasonality and Year-End Effects
Year-end balances can mislead when a business is seasonal or when the year ends at an unusual point in its cycle. A retailer's inventory peaks before the holiday season and falls sharply after it, so days calculated at a January year end understate the inventory it typically carries; a manufacturer that ships heavily in the last month of a quarter shows elevated receivables at each quarter end. Bankers compare days at the same point in each year, use averages of quarterly balances where available, and are wary of a single year's improvement that coincides with a change in year-end date or an unusual final quarter.
What Bankers Read in the Days
The days metrics are among the most practical tools in due diligence and credit work. A few patterns recur:
- 1.Rising DSO: customers paying more slowly, looser credit terms, or revenue recognized ahead of collection. Including contract assets alongside receivables gives a truer picture for contractors.
- 2.Rising DIO: slower sales, excess stock or obsolete products, often a precursor of markdowns and write-downs.
- 3.Rising DPO: better supplier terms, or a company stretching its suppliers or using supplier finance programs to fund itself.
- 4.Falling cycle with no operational change: a possible sign of year-end window dressing, such as delayed payments or accelerated collections around the balance sheet date.
How those programs work, and why analysts often treat them as debt, is covered in supplier finance and factoring. In acquisitions, the same metrics underpin the net working capital target set in the purchase agreement, which protects a buyer from a seller who runs down working capital before closing. In every case, the days translate balance sheet lines into a question about how the business operates: how quickly it collects, how long it holds stock, and how long its suppliers are willing to wait.
