Corporate Finance For Dummies

A store's management and investors use the operating cycle liquidity metric to determine how long it takes the store, from start to finish, to do everything it has to do to collect its money and complete a transaction

The period of time from the moment a company purchases its inventory to the moment the final payment on the sale of that inventory is made is called the operating cycle. You figure out a company’s operating cycle by using this equation:

Accounts receivables turnover in days + Inventory turnover in days = Operating cycle

Both of the numbers that go into this equation come from other metrics. So, unfortunately, you need to do some preliminary calculations before you can figure out a company’s operating cycle, but, trust me, it’s worth the extra work.

After all, the end result is a number that tells you how well a company is managing its assets by calculating you how long it takes the company to make money from start to finish.

To determine the accounts receivables turnover in days, use this metric:

To determine the inventory turnover in days, use this metric: