# Computing the Components of the Operating Cycle
Each period in the operating cycle is computed as average balance ÷ average flow per day. The numerator is a stock (balance) and the denominator is the relevant daily cost flow.
| # | Component | Formula |
|---|---|---|
| 1 | Raw Material Storage Period | Average stock of raw material ÷ Average cost of raw material consumption per day |
| 2 | WIP Holding Period | Average WIP inventory ÷ Average cost of production per day |
| 3 | Finished Goods Storage Period | Average stock of finished goods ÷ Average cost of goods sold per day |
| 4 | Receivables (Debtors) Collection Period | Average receivables ÷ Average credit sales per day |
| 5 | Credit Period Allowed by Suppliers (Creditors) | Average payables ÷ Average credit purchases per day |
## Key principle: match numerator to denominator
The denominator must be the same cost basis as the asset being measured:
- Raw material → measured at consumption cost
- WIP → measured at cost of production
- Finished goods → measured at cost of goods sold
- Receivables → measured at credit sales (not total sales)
- Payables → measured at credit purchases (not total purchases)
The holding period of each constituent of current assets and current liabilities can either contract or expand the net operating cycle period.