Operating cycle

The time from buying raw material to collecting cash from the customer, before any credit taken from suppliers. Inventory days plus receivable days.

For the distributor, the operating cycle is 122 days against a cash conversion cycle of 71, and the 51-day gap is the free funding its suppliers provide.

Keep the two numbers apart, because they answer different questions. The operating cycle measures how long the business model takes. The cash conversion cycle measures how much of that time the company has to fund itself. By paying suppliers later, a firm can shorten the second without improving the first at all, and an improvement made that way is borrowed from the suppliers.

It also sets the definition of a current asset. Where the operating cycle runs longer than a year, as in construction or shipbuilding, inventory is still classified as current.