Okay, so you want to know about the operating cycle formula. It's important to be familiar with it since it can help you make sound business decisions regarding inventory and other operating expenses such as cash flow. Using this, you can help keep your business running smoothly and efficiently.
Formulas and calculations
Operating Cycle = Inventory Period + Accounts Receivable Period
The inventory period is the average time it takes to sell your inventory. To calculate this, divide 365 days (1 year) by your inventory turnover, which can be calculated by dividing your cost of goods sold by your average inventory:
Inventory Period = 365 / (COGS/Average Inventory)
The accounts receivable period is the average time it takes for customers to pay their invoices. To get this, simply divide 365 days by your receivables turnover, which is your sales divided by your average collection period.
Accounts Receivable Period = 365 / (Sales/Accounts Receivable)
Why it's essential
The operating cycle formula is the time it takes to convert inventory into cash. You can use this number to assess the health of your business and make necessary changes to help keep things running smoothly. If, for example, you find that it's taking too long to sell your inventory, you may need to adjust your pricing or product mix. On the other hand, if you're not collecting payments quickly enough, you may need to tighten up your credit policies for your receivables in your accounting cycle.
In short, the operating cycle is a crucial metric for managing your business. Understanding and monitoring it enables you to make informed decisions that will help keep procurement a seamless process.