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Operating cycle (in days)

Method of calculation

Formula for operating cycle in days: inventories cycle in days + receivables cycle in days

Ratio's description

From a model perspective this ratio allows to estimate the number of days from the moment of the necessary stocks (raw materials, materials, goods) purchase, to the moment of cash inflow related to the collection of receivables resulting from the sales made wit hthe use of purchased stocks. Its length depends on the type of operating activity, stock management policy (organization of stock deliveries, storage of goods and finished products; production technology in use and trade credit policy. The operating cycle length is assessed with respect to the industry and its changes are analyzed based on the analysis of the changes in the partial cycles (inventories cycle, receivables cycle).

Ratio's interpretation

  • The shorter the operating cycle, the better the efficiency measured by the number of cycles realized within given period (e.g. a year).
  • Ratio values that are close to or lower than the ones calculated for the whole branch of industry are assessed positively.
  • The elongation of operating cycle in successive periods is assessed negatively, since it indicates the deterioration of current assets management efficiency. The reasons for such a situation should be sought through the analysis of the changes in the lengths of inventories and receivables cycles.
  • By analogy, the shortening of operating cycle is assessed positively, since it indicates the improvement in the efficiency of current assets management in the company.

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