![]() ![]() ![]() Such an issue could stem from the inefficient collection of credit purchases, rather than being due to supply chain or inventory turnover issues. The calculation of the operating cycle is relatively straightforward, but more insights can be derived from examining the drivers behind DIO and DSO.įor instance, the duration of a particular company could be high relative to that of comparable peers. The formula for calculating the operating cycle is as follows. DSO = (Average Accounts Receivable / Revenue) * 365 Days.DIO = (Average Inventory / Cost of Goods Sold) * 365 Days.Days Sales Outstanding (DSO): DSO measures the number of days it takes on average for a company to collect cash payments from customers that paid using credit.īelow are the formulas for calculating the two working capital metrics:.Days Inventory Outstanding (DIO): DIO measures the number of days it takes on average before a company must replenish its inventory on hand.The required inputs for the metric consist of two working capital metrics: End of Cycle: The”end” is when cash payment for the product purchase is received from customers, who often pay on credit as opposed to cash (i.e.raw material) was purchased by the company to turn it into a marketable product available for sale. Start of Cycle: The “start” of the cycle refers to the date when the inventory (i.e.The Operating Cycle tracks the number of days between the initial date of inventory purchase and the receipt of cash payment from customer credit purchases.Ĭonceptually, the operating cycle measures the time it takes a company on average to purchase inventory, sell the finished inventory, and collect cash from customers that paid on credit. ![]()
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