Operating cycle
Operating cycle is the average number of days between buying inventory and collecting cash from its sale, equal to days inventory outstanding plus days sales outstanding.
See it move
An equation shows Aurora Distributors' operating cycle of 87 days equals its days inventory outstanding of 55 days plus its days sales outstanding of 32 days. On average, stock sits unsold for 55 days, then customers take a further 32 days to pay, so almost three months pass between buying inventory and collecting cash from its sale.
The formula
Variables
- Days inventory outstanding (days)
- Days sales outstanding (days)
Gives the total number of days between paying for inventory and collecting cash from its sale.
Check yourself
A specialty tea importer has a days inventory outstanding of 68 days, a days sales outstanding of 24 days, and a days payables outstanding of 30 days. What is its operating cycle?