Technicals Stability Returns

Understanding Operating Cycle

Operating cycle determine the time taken by the company's process of putting cash in operations and returning it to the cash account. It measures how long it is tied up in the Operating Cycle.

The operating cycle determines the life cycle of cash used in operational activity. It follows the cash converted into inventory and then into the sale, then to account receivables are back to cash in hand. Essentially the operating cycle represents how quickly a company can convert the cash invested from the beginning (inventory investment) to the end (return as receivables).

The formula for Operating Cycle

Operating Cycle Ratio

Example: For the financial year, Burger King India reported Inventory days as 12.12 and Account Receivable Days as 5.36.
The value as per the formula (Inventory Period + Account Receivable Period) is calculated as (12.12 + 5.36) = 17.48.