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Importance of the operating cycle

What is an operating cycle? Why is it important? What are some methods your organization uses to improve the operating cycle?

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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.

The larger the operating cycle, larger will be the investment in current assets.

In practice, firms are acquire resources on credit. To that extent, a 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

Cash Conversion Cycle (CCC) = Operating Cycle (OC) - Payables Deferral Period http://mbacontent.googlepages.com/working-capital-concepts.htm.

Hence its importance is that it tells about the working capital requirement of the business.

Improvement in operating cycle
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Solution Summary

This discusses the importance of the operating cycle