Wednesday, 18 January 2012

Operating Cycle Ratio

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.


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