How can firms improve their operating cycle? What factors effect the size of a company's investment in fixed assets?
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. (Pandey, I.M.) Larger is the operating cycle, larger will be the investment in current assets.
In practice, firms 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 outstanding).
Operating Cycle (OC) = Inventory Conversion Period + Receivables Conversion Period
Net Operating cycle or Cash Conversion Cycle (CCC) = Operating Cycle (OC) - Payables Deferral Period
Improvement in operating cycle
This can happen by reducing the inventory conversion period, receivable conversion period and judiciously increasing the payables deferral period.
First of all it needs to reduce the inventory conversion period. But managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can ...
828 words on operating cycle improvements and investment assets.