Complete operating cycle analysis calculations simply with the following formula:
DIO represents days inventory outstanding
DSO represents day sales outstanding
DPO represents days payable outstanding
Calculating operating cycle may seem daunting but results in extremely valuable information.
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.
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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