Operating Cycle Definition
days inventory outstanding
day sales outstanding
days payable outstanding
Operating Cycle Formula
Complete operating cycle analysis calculations simply with the following formula:
Operating cycle = DIO + DSO – DPO
DIO represents days inventory outstanding
DSO represents day sales outstanding
DPO represents days payable outstanding
Operating Cycle Calculation
Calculating operating cycle may seem daunting but results in extremely valuable information.
DIO = (Average inventories / cost of sales) * 365 DSO = (Average accounts receivables / net sales) * 365
DPO = (Average accounts payables / cost sales) * 365
For example, what is the operating cycle of a business? A company has 90 days in days inventory outstanding, 60 days in days sales outstanding and 70 in days payable outstanding. See the following calculation to see how to work it out:
Operating cycle = 90 + 60 – 70 = 80
In conclusion, it takes an average 80 days for a company to turn purchasing inventories into cash sales. In regards to accounting, operating cycles are essential to maintaining levels of cash necessary to survive. As a result, maintaining a beneficial net operating cycle ratio is a life or death matter.
If you want statistical information about industry financial ratios, then go to the following websites: www.bizstats.com and www.valueline.com.
For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.
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