Companies can unlock value by reducing days sales in inventory. A lower days sales in inventory has a number of benefits: • Shorter cash conversion cycle • Lower inventory holding costs • Ability to operate with narrow margins Benefit #1 Reducing a company’s days sales in inventory shortens its cash conversion cycle. The cash conversion cycle, also known as the cash-to-cash cycle, is the sum of days sales in inventory (DSI) and days sales outstanding (DSO) minus days payable outstanding (DPO). Cash Conversion Cycle = DSI + DSO – DPO If a company can reduce days sales in inventory it can reduce the length of its cash conversion cycle, which means the company will need less capital to finance inventory. Benefit #2 Reducing a company’s days sales in inventory also reduces inventory holding costs. It’s not free to hold inventory, as companies incur the cost of: • Storing the inventory …
