What is the operating cycle of a business, and how do you calculate it?

Question

Accepted Answer

Operating cycle is the time it takes for a business to convert inventory into cash.

Operating cycle = Inventory conversion period + Receivables conversion period
Inventory conversion period = (Average inventory / Cost of goods sold) x 365
Receivables conversion period = (Average accounts receivable / Credit sales) x 365
Operating cycle helps in determining the efficiency of a business in managing its working capital
A shorter operating cycle indicates better efficiency and liquidity
Example: A business has an average inventory of $50,000 and cost of goods sold of $200,000. Its inventory conversion period is (50,000/200,000) x 365 = 91.25 days

Accepted Answer

the time it takes for a company to purchase inventory, sell it, and then collect cash from the sale

Accepted Answer

operating cycle is adding the Inventory period, IP = 365/(Cost of Goods/Inventory turnover), and the Accounts receivable period. ARP = 365/(Net sales/Receivables turnover).

Accepted Answer

The operating cycle is the time required for company cash to be deployed into its operations and then return to the company cash account

Accepted Answer

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What is the operating cycle of a business, and how do you calculate it?

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