From the course: Finance and Accounting Tips

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How to compute days' purchases in payables

How to compute days' purchases in payables

From the course: Finance and Accounting Tips

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How to compute days' purchases in payables

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- [Instructor] A firm's operating cycle is measured as the time from when inventory is purchased to when cash is collected from the sale of that inventory. Consider Proctor and Gamble, for example. They make Tide laundry detergent, Pampers diapers, and Dawn dishwashing liquid, to name a few. On average, it takes them across all their product brands about 57 days to turn raw materials into inventory and then sell it. Then they wait about 27 days before receiving the cash from the customer to whom they sold that inventory, like Walmart, their biggest customer. So their operating cycle is 84 days, 57 days to turn raw materials into inventory and then sell it, and then 27 days to collect the cash from that sale. Now, that may seem like a long time from start to finish from raw materials to inventory to accounts receivable to cash. But hold on. We need to factor in one more variable. How long does Proctor and Gamble have before they have to pay for the inventory they've purchased? In other…

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