DAYS ACCRUAL

Definition: Average number of days business takes to pay wage-related expenses.

Formula: Accruals x 360/ COGS

When Analyzing:

• Look for trends
• Compare Days Accrual with Payroll Cycle
  

Operating Cycle (OC)

Definition: Average number of days in which cash is tied up in operations of business before it returns as cash with a profit attached.

Formula: Days Receivable + Days Inventory - Days Payable - Days Accrual

When Analyzing:

• Is the company’s actual permanent working capital position near the level of the company’s needed permanent working capital
  position?
• Cash businesses (e.g. restaurants) can have a negative operating cycle and still be healthy.
• Long cycle businesses (ship builders, etc.) can have a very long operating cycle and still be healthy. They do, however, have a great need for additional working capital financing from outside the company.
• Beware of a company whose operating cycle goes from positive to negative.