FRM: Operating efficiency

Explanations, applications and practice for operating efficiency.

• Simple and effective annualized trade-credit costs

  Compare distinct rate conventions before comparing financing alternatives.

  Comparisons

• Operating cycle and cash conversion cycle

  Distinguish the operating clocks from the net clock after supplier-payment timing.

  Comparisons

• Cash conversion cycle from its three components

  Use the cash conversion cycle from its three components relationship with explicit definitions.

  Formulas

• Days of inventory on hand

  Use the days of inventory on hand relationship with explicit definitions.

  Formulas

• Days payable outstanding with an explicit purchases flow

  Use the days payable outstanding with an explicit purchases flow relationship with explicit definitions.

  Formulas

• Days sales outstanding and the sales denominator

  Use the days sales outstanding and the sales denominator relationship with explicit definitions.

  Formulas

• Basic economic order quantity

  Use the basic economic order quantity relationship with explicit definitions.

  Formulas

• Inventory turnover and its cost-flow basis

  Use the inventory turnover and its cost-flow basis relationship with explicit definitions.

  Formulas

• Operating cycle from inventory and receivable days

  Use the operating cycle from inventory and receivable days relationship with explicit definitions.

  Formulas

• Payables turnover using a purchases base

  Use the payables turnover using a purchases base relationship with explicit definitions.

  Formulas

• Receivables turnover with a stated sales base

  Use the receivables turnover with a stated sales base relationship with explicit definitions.

  Formulas

• Simple and effective annualization of discount costs

  Use the simple and effective annualization of discount costs relationship with explicit definitions.

  Formulas

• Period cost of forgoing an invoice discount

  Use the period cost of forgoing an invoice discount relationship with explicit definitions.

  Formulas

• Cash conversion cycle and its flow bases

  Match inventory, receivables and payables with the flows and period length used to calculate their days.

  Lessons

• Economic order quantity and the ordering-holding trade-off

  Inspect the deterministic cost objective before using the square-root order quantity.

  Lessons

• Early-payment discounts and the additional credit period

  Separate invoice timing, the discount amount and the cost of financing a discounted payment.

  Lessons

• Why a cash-cycle reduction does not specify cash released

  Use each changed component’s own flow base instead of multiplying all days by COGS.

  Common mistakes
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  Operating-ratio definition log

  Download a worksheet for flow bases, averages, proxies and interpretation.

  Templates
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  Cash conversion cycle calculator

  Compute inventory, receivable and payable days with explicit period flows.

  Tools
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  Economic order quantity calculator

  Inspect the deterministic ordering and holding cost trade-off.

  Tools
• 

  Trade-credit discount cost calculator

  Compare an invoice discount, two annualization conventions and a stated funding model.

  Tools

• Calculating a cash cycle with separate flow bases

  Reconstruct each days measure before combining the result.

  Worked examples

• Funding the discounted invoice amount

  Compare cash costs over the actual gap between payment dates under a stated simple-rate model.

  Worked examples

• Checking nearby order quantities around EOQ

  Compare the objective value rather than assuming a rounded quantity is automatically optimal.

  Worked examples

• Purchases versus COGS in payable days

  Show why an inventory movement changes the flow used for a payables comparison.

  Worked examples