What is Operating Cycle?
The Operating Cycle measures the total time from when you invest cash in inventory until you collect cash from the resulting sale. It shows how long your money is locked in the core business process.
Why Operating Cycle Matters
Operating Cycle reveals how quickly your business converts cash investments into cash returns, excluding payment timing to suppliers. A shorter operating cycle means faster capital velocity and better liquidity.
For ecommerce founders, understanding your operating cycle helps with cash planning. If your cycle is 90 days, you need enough working capital to fund 3 months of operations before cash returns.
Operating Cycle vs Cash Conversion Cycle
Operating Cycle ignores when you pay suppliers. Cash Conversion Cycle factors in DPO. Operating Cycle shows operational efficiency; CCC shows financing efficiency.
Formula
Operating Cycle = DIO + DSO
DIO = Days Inventory Outstanding
DSO = Days Sales Outstanding
Example
Your ecommerce company has:
- DIO: 45 days (inventory sits before sale)
- DSO: 30 days (customer pays after sale)
Operating Cycle = 45 + 30 = 75 days
From purchasing inventory to collecting customer payment takes 75 days on average. Reducing either DIO or DSO shortens this cycle and frees up cash.