Operating cycle refers to the total time period the business takes to generate cash from its operations. It includes the total time a business takes purchasing stock, storing it, and selling the stock, and then collecting payments from customers. In short, it covers inventory days and receivable days.
The formula is:
Operating cycle = Inventory Days + Accounts receivable Days
Assume a company trades in cars. The cars are purchased from a supplier, and once the inventory reaches the showroom these are expected to sell in 3 months. After the sales are made, accounts receivables normally settle within 15 days. The operating cycle will be as follows.
Operating cycle = 90 days + 15 days = 105 days
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