How to Calculate Gross Cash Cycles
Gross cash cycles calculate the amount of time it takes to purchase inventory, sell the inventory and receive payments for goods sold. This cash cycle works as a method to keep a record of the inventory you have available. When calculating a gross cash cycle, however, you do not take into account creditor deferral periods. Generally, shorter gross cash cycles are optimal because this means that your company operated efficiently, operating costs are low and it does not take long to recover the costs spent on inventory.
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Instructions
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1
Figure out the inventory conversion period. Find your average inventory by adding your starting amount of inventory to the amount of inventory you have at the end of your accounting period and then dividing the sum in half. Then, divide the average amount of inventory you have by the cost of goods you sold divided by 365. The final answer you get is the DIO (days inventory outstanding). DIO = Average Inventory/(cost of goods/365).
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2
Find the daily sales amount that remains outstanding, which is the receivables conversion period. Your answer, the DSO (daily sales outstanding), is the amount of time it takes for you to receive customer payments. Divide your credit sales by 365. Then, divide the average of your accounts receivable by the figure you just calculated. DSO = Average Accounts Receivable/(credit sales/365).
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3
Determine the payables conversion period or DPO (days payable outstanding). Calculate the average accounts payable, and divide that by figure you get when you divide your cost of goods by 365. The resulting figure shows how long it took the business to pay its bills. DPO = Average Accounts Payable/(cost of goods/365).
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4
Calculate the gross cash cycle. Add your answers from Steps 1 and 2. Then, subtract that sum from your answer in Step 3. Your answer is the number of days it takes for your company recover the funds its spent on inventory. Gross Cash Sales = DIO+DSO-DPO
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Tips & Warnings
Another name for a gross cash cycle is a cash conversion cycle.
If your company deals with financing activities and investments, you will need to need to refer to your statement of financial position data, not the general cash flow data, for the gross cash cycles to match your figures correctly. The financial position date is similar to your company's cash flow data but does not include figures regarding investments or credit deferments.
