Operating Cycle Definition
days inventory outstanding
day sales outstanding
days payable outstanding
Operating Cycle Formula
Operating cycle calculations are completed simply with this 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
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.
Operating cycle = 90 + 60 - 70 = 80
This means that on average it takes 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. Maintaining a beneficial net operating cycle ratio
is a life or death matter.
For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com