Working capital in a high-velocity supply chain

• DIO (Days Inventory Outstanding): how long product sits as inventory before it is sold.
• DSO (Days Sales Outstanding): how long customers (retailers, distributors) take to pay you after purchase.
• DPO (Days Payable Outstanding): how long you take to pay your suppliers.

Think of it as: money goes out (inventory and supplier payments), money comes in (customer collections). The gap between them is what you must finance yourself.

A concrete example

Imagine a personal care company:

• DIO = 45 days (raw materials plus finished goods)
• DSO = 40 days (large retailers pay slowly)
• DPO = 60 days (you negotiated long terms with packaging suppliers)

CCC = 45 + 40 - 60 = 25 days.

That means for 25 days, your own cash funds the operation. On a business turning over, say, 2 billion in cost of goods, roughly every day of CCC ties up around 5.5 million (2 billion divided by 365). So 25 days equals roughly 137 million locked in working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition →.

Now cut DIO to 35 days by clearing slow SKUs. CCC drops to 15 days, freeing about 55 million. That is real cash, with no new sales required.

Why FMCG is a special case

Three features make working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition → in FMCG uniquely high-stakes.

1. High velocity, thin margins. A yogurt maker might earn a few cents per cup but sell millions daily. Small changes in days translate into large absolute cash swings.

2. Retailer power over DSO. Large grocery and drugstore chains have enormous buying power. They frequently push for extended payment terms (60, 90, or more days). A supplier that wants shelf space often accepts them. Your DSO is partly outside your control.

3. Perishability and promotions distort DIO. A slow-moving SKU is not just idle cash. In food and beauty it risks expiry, markdowns, and write-offs. Meanwhile, heavy promotional periods (holiday seasons, festival calendars) cause inventory to swell before it drains.

Dissecting each lever

DIO: the SKU-level trap

Aggregate DIO hides the villains. A portfolio might average 40 days while a handful of underperforming SKUs sit at 120 days.

Practical tools finance teams use:

• SKU-level inventory aging: list every SKU by days-on-hand. Long-tail slow movers are cash graveyards.
• ABC analysis: classify SKUs by contribution. Your top 20 percent of SKUs often drive 80 percent of volume; the bottom tail may not justify the working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition → it consumes.

The finance question is blunt: does this SKU earn enough margin to justify the cash it ties up? If not, rationalize it.

DSO: the silent stretch

DSO creep is dangerous because it is invisible on the income statement. Revenue still looks fine. But if a major retailer quietly shifts from 45 to 65 day payment, your cash position erodes without any sales alarm going off.

Watch for:

• Overdue receivables: invoices past agreed terms.
• Customer concentration: if one chain is 30 percent of sales and they stretch terms, the impact is severe.
• Deductions and disputes: retailers often short-pay invoices over promotional claims or delivery discrepancies, extending effective DSO.

DPO: financing from suppliers (carefully)

Extending DPO means holding your own cash longer. It is the cheapest financing available: it costs nothing if suppliers agree.

But there are limits. Squeeze a small supplier too hard and you may damage a critical relationship or push them into distress. That is why many large FMCG firms use supply chain finance (also called reverse factoring): a bank pays the supplier early at a small discount, while the buyer pays the bank later. The supplier gets cash fast; the buyer keeps long terms. It can be a win, but it has drawn scrutiny when used to hide effective debt off the balance sheet.

For a clear, neutral primer, see the Corporate Finance Institute overview of the cash conversion cycle.

Modeling the cycle: a simple framework

Here is a lightweight calculation you can run on any business.

Run it, then flex one input. Drop inventory by 10 percent and watch DIO and the cash freed. This "what if" muscle is exactly what a finance business partner brings to supply chain meetings. The numbers above are illustrative, not real company figures.

Where the millions hide

Put the levers together with a scenario.

A beverage company launches a premium line. Sales look healthy on paper. But:

• The premium SKUs are slow movers in secondary cities, pushing DIO up 12 days.
• A major supermarket customer stretched terms during negotiation, adding 10 days to DSO.
• To keep suppliers happy after a price dispute, the company shortened DPO by 8 days.

Combined, CCC rises by 30 days. On a 2 billion COGS base, that is roughly 164 million of extra cash tied up, funded by short-term borrowing or a drained cash balance. The launch may still be "profitable" while quietly starving the business of cash.

This is why treasury and commercial teams must sit together. A promotion that boosts revenue can destroy working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition → if it floods the channel with inventory that sells slowly.

Managing working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition → in practice

Set targets per lever, not just aggregate CCC. A single CCC number can look stable while DSO worsens and DPO masks it. Track all three.

Tie SKU decisions to cash, not just margin. Rationalizing the slow tail frees cash and reduces write-off risk. Many FMCG portfolio reviews now include a working capitalworking capitalWorking capital is the difference between a company's current assets and current liabilities, measuring short-term liquidity and the funds available to run daily operations.View full definition → column alongside gross margingross marginGross margin is the share of revenue left after subtracting the direct cost of producing goods or services, expressed as a percentage of revenue.View full definition →.

Forecast around seasonality. Inventory builds ahead of peak demand. Plan financing for the build, and set clear drawdown targets after the peak so stock does not linger.

Govern payment terms centrally. If every commercial deal can quietly extend DSO, cash leaks everywhere. Finance should approve term changes above a threshold.

Use supplier financing transparently. Reverse factoring can help all parties, but disclose it. Regulators and rating agencies increasingly ask companies to reveal such arrangements because they can obscure true leverage.

Key Takeaways

• CCC = DIO + DSO - DPO. In high-volume FMCG, each single day can equal millions in trapped or freed cash, so days matter as much as margins.
• Slow SKUs are cash graveyards. Use SKU-level aging and ABC analysis; judge products by the cash they consume, not just their profit per unit.
• DSO creep is silent. Revenue can look healthy while a stretched retailer term quietly drains your cash. Monitor overdue receivables and customer concentration.
• DPO and supply chain finance are cheap funding, within limits. Extend terms fairly and disclose reverse factoring so it does not hide real leverage.
• Working capital is a cross-functional job. A revenue-boosting promotion can wreck cash if it floods channels with slow inventory, so commercial and finance teams must model the cycle together.