What are DSO, DIO, and DPO, and how do changes in these working-capital drivers affect cash flow?

• A. DSO = days sales outstanding; DIO = days inventory outstanding; DPO = days payable outstanding; increases in DSO/DIO reduce cash, increases in DPO improve cash; changes affect CFO.
• B. DSO = days sales outstanding; DIO = days inventory outstanding; DPO = days product outstanding; increases in DSO reduce debt.
• C. DSO = days service outstanding; DIO = days investment outstanding; DPO = days purchase outstanding; increases in DPO reduce cash.
• D. DSO, DIO, and DPO are irrelevant to cash flow in forecasting.

Answer: (A)

Working-capital timing drives cash flow. DSO, DIO, and DPO are the three main measures of how long money stays tied up in the business: DSO is the average number of days to collect a sale’s payment, DIO is the average number of days inventory sits before it’s sold, and DPO is the average number of days you wait to pay suppliers. If DSO rises, cash collection slows, so cash flow from operations falls in the period. If DIO rises, more cash is tied up in inventory longer, also reducing near-term cash flow. If DPO rises, you delay paying suppliers, which preserves cash longer and improves cash flow. In forecasting, changes in these drivers move cash flow from operations through their effect on working capital.