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Describe the operating cycle and the cash cycle.

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Describe the operating cycle and the cash cycle. What are the differences between them?

When you analyze a company's financial health, what kind of ratios would you review? (please list top 3 financial ratios you would consider the most important and which would provide you with a clear idea on the financial status of the company you're trying to analyze)

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Solution Summary

The solution describes the operating cycles and the cash cycles.

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Operating Cycle is defined as the time duration, which the firm requires to manufacture and sell the product and collect cash. Thus operating cycle refers to the acquisition of resources, conversion of raw materials into work-in-process into finished goods, conversion of finished goods into sales and collection of sales.
Larger is the operating cycle, larger will be the investment in current assets.

In practice, firms are acquire resources on credit. To that extent, firm's need to raise working finance is reduced. Net Operating Cycle is used for the difference between operating cycle (or gross operating cycle) and the payment deferral period (or the period for which creditors remain ...

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