See Also:
Operating Cycle Definition
days inventory outstanding
Cash Cycle
day sales outstanding
days payable outstanding
Financial Ratios
Operating Cycle Formula
Operating cycle calculations are completed simply with this formula:
Operating cycle = DIO + DSO - DPO
Where
DIO represents
days inventory outstandingDSO represents
day sales outstandingDPO represents
days payable outstandingOperating 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.
Resources
For statistical information about industry financial ratios, please go to the following websites:
www.bizstats.com and
www.valueline.com.