Payment Period to Operating Cycle Ratio

Payment Period to Operating Cycle Ratio

Formula to calculate payment period to operating cycle

Payment Period to Operating Cycle = payment period / (average inventory period + collection period).



Payment period to operating cycle ratio definition and explanation:


A payment period to operating cycle ratio above 1:1 (100%) indicates that the inventory is sold and collected before it is paid for (inventory does not need to be financed).



A high payment period to operating cycle ratio indicates that the company may be vulnerable to tightened terms of payments from their suppliers.

(the average inventory period is also known as the inventory holding period)