A company reports $360M sales, $30M AR, $240M COGS, $60M inventory, $20M AP, and $10M accrued expenses (all operating and related to COGS). Using a 360‑day year, calculate DSO, DIO, DPO, and the cash conversion cycle. The company then pivots to a subscription model where customers pay $60M annually upfront. Qualitatively, how does this shift affect the CCC and why?

DSO = (30 / 360) × 360 = 30 days. DIO = (60 / 240) × 360 = 90 days. DPO = ((20+10) / 240) × 360 = 45 days. CCC = 30 + 90 – 45 = 75 days.

After shifting to a subscription model with upfront payments, the company will essentially eliminate AR (DSO falls near zero) and will hold no meaningful inventory because it sells services. Instead, cash collected upfront creates a large deferred revenue liability. Traditional CCC becomes meaningless because the operating cycle flips: cash arrives before any costs are incurred. The business effectively has a negative operating cycle, it receives customer cash upfront, invests it, and later incurs service costs. So the CCC could be thought of as negative, but it is better measured by free cash flow conversion and the trend in deferred revenue.

Follow-up pressure:

• How would you quantitatively capture a negative operating cycle if you still wanted a days metric? Could you construct a “days of deferred revenue” figure?
• If the company then offers a monthly payment option that halves the upfront cash, what happens to the cash flow profile and how would you model the change in NWC?
• Would the negative CCC make the company less sensitive to economic downturns? Explain the hidden risk.