What it means in practice
A common calculation adds inventory days and receivable days, then subtracts payable days. Each component needs a consistent period and suitable accounting inputs. The measure is a summary, not a prediction of every payment date. It may need adaptation for a service business or unusual operating model. Use it to ask where cash waits and then inspect the underlying stock, invoices and supplier commitments. Use average balances and consistent annual denominators when calculating days. Inventory and payables are usually compared with cost of goods sold, while receivables are compared with revenue. A negative cycle can reflect favourable agreed terms, but can also conceal overdue suppliers. Interpret the operating reasons behind the number before assuming that a shorter cycle is always a healthier one.
A fictional worked example
An illustrative cycle with 30 inventory days, 20 receivable days and 15 payable days is 35 days.
A useful question
Which component creates the largest avoidable delay in your operating cycle?
Read the practical guide