What is Operating Cycle?
Nexa Consultancy | Startup & Finance Glossary
The Operating Cycle is the average time it takes for a company to purchase inventory, sell it, and then collect cash from the sale. It is a measure of how long cash is tied up in the operational processes of a business. A shorter operating cycle is generally better, as it indicates greater efficiency and better liquidity.
For Startups: For D2C or manufacturing startups, managing the operating cycle is a key aspect of working capital management. A long operating cycle can strain cash flow, as the company has to fund its inventory and wait for customer payments for an extended period. A virtual CFO helps analyze and optimize each component of the cycle.
Calculation: Operating Cycle = Days of Inventory Outstanding (DIO) + Days Sales Outstanding (DSO).
Example: A company takes 60 days to sell its inventory and another 30 days to collect payment from customers. Its operating cycle is 90 days.