1. What is the Operating Cycle?

The Operating Cycle (OC) measures the time it takes for a company to convert its inventory into cash. It represents the number of days between purchasing inventory and receiving cash from sales, calculated as DIO + DSO - DPO.

2. How Does the Calculator Work?

The calculator uses the Operating Cycle formula:

Where:

• \( DIO \) — Days Inventory Outstanding (average days inventory is held)
• \( DSO \) — Days Sales Outstanding (average days to collect receivables)
• \( DPO \) — Days Payable Outstanding (average days to pay suppliers)

Explanation: The operating cycle shows how efficiently a company manages its working capital and cash flow cycle.

3. Importance of Operating Cycle Calculation

Details: A shorter operating cycle indicates better liquidity and more efficient operations, while a longer cycle may signal working capital management issues.

4. Using the Calculator

Tips: Enter DIO, DSO, and DPO values in days. All values must be non-negative numbers representing average days for each component.

5. Frequently Asked Questions (FAQ)

Q1: What is a good operating cycle length?
A: Shorter cycles are generally better, but optimal length varies by industry. Compare against industry benchmarks for meaningful analysis.

Q2: How do I calculate DIO, DSO, and DPO?
A: DIO = (Average Inventory / COGS) × 365, DSO = (Average Accounts Receivable / Revenue) × 365, DPO = (Average Accounts Payable / COGS) × 365

Q3: Can operating cycle be negative?
A: Yes, if DPO exceeds the sum of DIO and DSO, indicating the company pays suppliers after receiving customer payments.

Q4: How does operating cycle affect cash flow?
A: Shorter cycles improve cash flow by converting inventory to cash faster, reducing working capital requirements.

Q5: What's the difference between operating cycle and cash conversion cycle?
A: They are essentially the same calculation - both measure DIO + DSO - DPO to determine the cash conversion timeline.