Working Capital Management

Operating Cycle method

The Operating cycle is expressed as an indicator (days) of management performance efficiency, the operating cycle is a twin of the cash conversion cycle. While the parts are the same- receivables ,inventory and payables- in the operating cycle, they are analyzed from the perspective of how well the company is managing these critical operational capital assets as opposed to impact on cash

Formulae:
Operating ycle (!ays) "!#O $!%O-!&O

DIO- !ays #nventory O'tstanding DSO- !ays %ales O'tstanding DPO- !ays &ayable O'tstanding
DIO is computed by:

(. Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure; ). Calculating the average inventory figure by adding the year's beginning (previous yearend
amount) and ending inventory figure (both are in the balance sheet) and dividing by 2 to obtain an average amount of inventory for any given year; and *. Dividing the average inventory figure by the cost of sales per day figures

Days of nventory !utstanding " #verage nventory$Cost of %ales per day

DSO is computed by:

(. Dividing net sales (income statement) by 365 to get net sales per day figure; ). Calculating the average accounts receivable figure by adding the year's beginning (previous
yearend amount) and ending accounts receivable amount (both figures are in the balance sheet) and dividing by 2 to obtain an average amount of accounts receivable for any given year; and *. Dividing the average accounts receivable figure by the net sales per day figure&

Days of sales outstanding " #verage accounts receivable$ net sales per day

DPO is computed by: Dividing the cost of sales (income statement) by 365 to get a cost of sales per day figure; Calculating the average accounts payable figure by adding the year's beginning (previous yearend amount) and ending accounts payable amount (both figures are in the balance sheet)' and dividing by 2 to get an average accounts payable amount for any given year; and Dividing the average accounts payable figure by the cost of sales per day

Days (ayable outstanding " #verage accounts (ayable$ cost of sales per day