Operating cycle
The time taken to complete a chain of activities like raw materials acquisition, processing, producing good and products, selling and finally receiving payments is referred to as the operating cycle. It is a continuous process as long as the company still operates.
Operating Cycle = Length of time for Raw Material in store + Time taken to process raw materials+ Period before good are sold + the period for receiving payments (Bulakhi, 2017).
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If an operating cycle of a company has problems, then nearly all business operations will come to a standstill. However, if it operates smoothly, then every other operation shall go on as expected. A company is run by money, therefore for effective management, financial managers should properly understand operating cycles to identify threats and manage risks.
Cash Operating Cycle
Cash cycle refers to how long it takes a company to receive cash from its investment. It is the period between raw materials acquisition and the time of receiving payments of the goods and products from the customers (Bulakhi, 2017). It is calculated a shown below .
Cash Operating Cycle = Period Raw materials are kept in stores+ Period given for customers to pay – Creditor’s Payment Period (Dechow, 2014).
Financial managers can use the period of Cash flow operating cycle of a company to measure the working capital and efficiency of the company’s management. A business with shorter operating cycle continuous flow of cash and makes finances available for development and growth of the company. On the other hand, a longer Cash flow operating cycle inconveniences to the company as it takes them so long to receive payments from the customer. It, therefore, means that for a longer period they will have a deficiency in cash to sustain its operations.
References
Bulakhi, S. (2017). Operating Cycle and Cash Operating Cycle . Finance management . Retrieved 16 November 2017, from https://efinancemanagement.com/working-capital-financing/operating-cycle-and-cash-operating-cycle
Dechow, P. M. (2014). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of accounting and economics , 18 (1), 3-42.
