Financial management in businesses plays a critical role that determines, directly and indirectly, the realization of the goals and objectives of any business. Business plays an important part in the society and, hence, the management and administrators of such business entity require more relevant and competent skills that would increase the chances of operating and running such businesses successfully, and financial management is no exception among the critical skills. However, among the many critical subjects and skills in the financial management discipline, this paper presents the discussion of operating and cash cycles and how they are critical to businesses and financial managers.
The operating cycle is the sum of time that it takes a firm to acquire goods in stock (inventory), sell the goods as well as receive the cash from its customers as a result of the sold goods or services. The operating cycle varies depending on the company policies and its trade partners (Michalski, 2016). For example, the payment terms that the company extends to its customers as well as the payment that the company makes, for example, to its suppliers and the terms involved. A company reduces its operating cycle by delaying the outlay of cash when given more time by suppliers to pay its inventory. On the contrary, the operating cycle of company increases when customers are given more time to pay for the goods for the company waits longer to get its cash. Businesses are encouraged to embrace a shorter operating cycle.
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Cash cycle, on the other hand, is the time a company takes to convert resources into cash. It is calculated by analyzing the amount of time that each dollar incurred by a company takes before it is converted into cash in the terms of accounts receivable as well as paid invoice. A smaller cash cycle indicates a firm has a more dependable access to cash on hand and, therefore, additional prospects to use the cash to enhance organizations goals and objectives (Borad, 2009).
It is important for financial managers to understand both cycles to help them monitor and evaluate how their business are operating and managed. They act as guidance for business enabling the manager take drastic action and correct any shortcomings that might delay the realization of the business goals and objectives (Wahlen, Bradshaw, Baginski & Stickney, 2010). They both show operating efficiency and cash flow management that are crucial for any business management and hence critical.
References
Borad, S. B. (2009). Operating Cycle and Cash Operating Cycle . Retrieved from https://efinancemanagement.com/working-capital-financing/operating-cycle-and-cash-operating-cycle
Michalski, G. (2016). Full operating cycle influence on the food and beverages processing firms characteristics. Agricultural Economics / Zemedelska Ekonomika , 62(2), 71-77.
Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial Reporting, Financial Statement Analysis, and Valuation. Mason, Ohio: South-Western.
