The company has earned a profit on delivered work, but some cash is still in receivables, some in unsold equipment, and some in work that must meet further conditions before payment becomes unconditional. Net profit alone does not show how long the business must fund the wait.
Turnover rates and days connect balances to the activity that produced them. The crucial rule is that the numerator and denominator must cover the same activity. Equipment inventory should not be divided by total costs that include systems integration labor. Trade payables for goods should not be compared with company-wide sales.
This article uses the same hypothetical company, comparing year 1 (Y1) and year 2 (Y2). It calculates the cash conversion cycle for the equipment line separately, then examines how software and SI businesses should track unbilled work. Figures cover 12-month years, use 365 days and opening-and-closing averages, and offer no universal target for collection or inventory days.
From balances to turnover and days
THB 22 million of year-end receivables tells us what was outstanding that day. To assess speed across the year, compare average receivables with credit sales over the same period. Receivables turnover is net credit sales divided by average receivables. Days sales outstanding (DSO) reverses that relationship: average receivables divided by net credit sales, multiplied by days in the period.
With matched bases, DSO also equals 365 divided by turnover for this annual period. The result is an aggregate indicator, not the actual age of every invoice. Some customers may pay on time while older items remain unpaid, so open the receivables aging report as well.
For inventory, divide cost of goods sold by average inventory to get turnover. Days inventory outstanding (DIO) is average inventory divided by cost of goods sold, multiplied by 365. Inventory and cost of sales share a cost basis. Substituting sales mixes prices and profit into what we want to measure.
Match payables with the credit purchases that created them. Days payables outstanding (DPO) is average payables divided by credit purchases, multiplied by 365. Where credit purchases are unavailable, reports may use cost of sales as a proxy. Disclose that choice and be careful when inventory changes sharply, because purchases and goods sold differ.
Use equipment figures for the equipment business
In year 2 the company has THB 125 million total revenue and THB 77 million total cost of sales. The equipment line alone has THB 75 million credit sales and THB 48 million cost of goods sold. The rest belongs to systems integration and support. Inventory and trade payables in this case are entirely equipment-related; accrued service costs sit in a separate account.
Equipment inventory rises from THB 10 million to THB 13 million in year 2, so assumed equipment purchases are 48 + 3 = THB 51 million, all on credit. This calculation works in the simplified example with no write-offs, returns, foreign-exchange changes, or other movements. Real figures need those adjustments.
| Item | Start of year 1 | Year 1 / end of year 1 | Year 2 / end of year 2 |
|---|---|---|---|
| Equipment credit sales during the year | Not applicable | 60.00 | 75.00 |
| Cost of equipment sold during the year | Not applicable | 40.00 | 48.00 |
| Equipment credit purchases during the year | Not applicable | 42.00 | 51.00 |
| Equipment receivables at measurement date | 7.00 | 10.00 | 15.00 |
| Equipment inventory at measurement date | 8.00 | 10.00 | 13.00 |
| Equipment payables at measurement date | 7.00 | 9.00 | 11.00 |
Year 2 averages are therefore receivables (10 + 15) ÷ 2 = THB 12.5 million, inventory (10 + 13) ÷ 2 = THB 11.5 million, and payables (9 + 11) ÷ 2 = THB 10 million. All belong to the same equipment line. With seasonality or large within-year swings, use a finer average than two points.
Read the cash cycle within one scope
For year 2, DSO is 12.5 ÷ 75 × 365 = 60.83 days; DIO is 11.5 ÷ 48 × 365 = 87.45 days; and DPO is 10 ÷ 51 × 365 = 71.57 days. Round only for display.
The cash conversion cycle (CCC) is DIO + DSO − DPO: time waiting to sell goods and collect receivables, less the credit period suppliers provide. It is about 76.71 days in year 2. This is an average-balance indicator for equipment, not a statement that every baht left the bank for precisely that many days.
Equipment cash cycle, year 2
DIO + DSO − DPO87.45 + 60.83 − 71.57
76.71 days
| Measure | Year 1 | Year 2 |
|---|---|---|
| DSO, days to collect receivables | 51.71 | 60.83 |
| DIO, inventory days | 82.13 | 87.45 |
| DPO, days to pay suppliers | 69.52 | 71.57 |
| CCC, cash conversion cycle | 64.31 | 76.71 |
Two changes warrant investigation: goods take longer to sell, and receivables take longer to collect. More supplier credit cushions some of this but not all. We cannot yet conclude that customers defaulted or inventory is obsolete. Credit terms may have changed, or goods may have been prepared for signed orders. Detail is needed to test those explanations.
Systems integration has a wait before a receivable exists, too
In this example, a trade receivable is an unconditional right to payment except for the passage of time. A contract asset is subject to another condition, such as hypothetical acceptance terms for part of the work. Lack of an invoice alone does not make every balance a contract asset. The rights and terms of the actual contract control the distinction.
The hypothetical company's contract assets rise from THB 6 million to THB 9 million in year 2. Receivables aging alone misses cash waiting before that stage. The project team should separate incomplete delivery, missing acceptance evidence, and an unconditional payment right whose billing paperwork is still pending. Each may call for a different owner and action.
- Deliver under the contractCheck work status and evidence
- Meet payment conditionsSeparate conditional rights from receivables
- Bill and collectTrack due dates and disputes
For company-wide DSO here, we define the denominator as net credit billings, matching the receivables those billings created. Year 2 billings are THB 122 million, different from recognized revenue of THB 125 million because hypothetical contract assets rose THB 3 million. Average total receivables are (16 + 22) ÷ 2 = THB 19 million. DSO on this billing base is 19 ÷ 122 × 365 = 56.84 days, versus 52.14 days in the prior year.
This is a billing-based DSO defined to track work in this example. It does not prescribe that base for every DSO report. If a report uses recognized credit sales, state the definition and show conditional rights separately. Do not mix company-wide DSO of 56.84 days with equipment-only DIO and DPO and call the result a company-wide CCC.
Equipment and company-wide days use different bases
Equipment line only, days
Chart scale: 0 to 100 days
DSO uses equipment credit sales, DIO equipment costs, and DPO equipment credit purchases; CCC = DIO + DSO − DPO
Equipment inventory days (DIO)
Equipment collection days (DSO)
Equipment supplier-payment days (DPO)
Equipment cash conversion cycle (CCC)
Whole company, different base from equipment CCC
Chart scale: 0 to 100 days
These two rows use different denominators. Do not add them into one cycle or mix them with equipment DIO/DPO. They are aggregate ratios, not the age of each document.
Company-wide DSO on credit billings
Average contract assets relative to revenue
Shorten days without creating a problem elsewhere
Shorter DSO may release cash, but cutting credit to valuable customers can hurt sales and profit. On-time follow-up, dispute resolution, and complete billing documents may help more than withdrawing credit from everyone at once.
Shorter DIO may free cash from inventory, but spare parts with long replenishment times differ from goods no one wants. A factory should separate raw materials, work in progress, and finished goods, then examine waits and scrap at each stage. One overall figure can hide the actual bottleneck.
Longer DPO is not always good. Paying late can forfeit discounts or cause suppliers to stop deliveries. Relieving today's cash pressure may raise tomorrow's costs. Separate agreed trade credit from overdue balances; a higher average is not a reason to delay payment without agreement.
A negative CCC does not guarantee safety. A business may collect before delivery while still owing work, goods, or refunds under certain terms. The cash plan must include those obligations rather than treating advances as freely available cash.
Check the items holding cash up
A software or SI team should list work awaiting acceptance, unbilled work, and overdue receivables separately, with an owner and next action for each. A factory should age raw materials, work in progress, and finished goods and record why they are held. This connects a rising days measure to work that can be fixed.
When designing data in Odoo, make it possible to separate sales, receivables, inventory, and payables by the scope being analyzed and to verify document completeness. Do not mix service costs with goods inventory just because both sit on one cost-of-sales line. The links require business-specific design and testing; a module name is no guarantee.
Start with one group that materially affects cash, such as a large equipment receivable or a project awaiting acceptance for months. Record an evidence-backed expected collection date. Next we read liquidity, because current assets above short-term liabilities do not answer whether cash arrives before payments fall due.
For more on turnover and working capital, see CFA Institute, Financial Analysis Techniques The difference between contract assets and receivables uses the framework in IFRS 15 paragraphs 105–108 to explain the example. This does not assert that every Thai business applies the same standard. The equipment, systems integration, and billing bases here were constructed specifically for this case. Use definitions and data that match a real business.
