Operating Cycle
OPERATING CYCLE
The way working capital moves around the business is modeled by the working capital cycle.This shows the cash coming into the business,what happens to it while the business has it and then where it goes.the term operating cycle otherwise known as “cash cycle”.In order to earn sufficient profits,a firm has to depend on its sales activities apart from others.The continuing flow from cash to suppliers,to investors,to debtors and back in cash.The time gap is technically termed as operating cycle.In other words,the duration of the time required to complete the following sequence of events,in case of a manufacturing firm,Is called operating cycle.
1)Conversion of cash into raw materials
2)Conversion of raw materials into work-in-progress
3)conversion of work-in-progress into finished goods
4)conversion of finished goods in debtors
5)conversion of debtors to cash
Bewteen each stage of this working capital cycle there is time delay.For some business this will be very long where it takes them a long time to make and sell the product.They will need a substantial amount of working capital to survive.Others though may receive their cash very quickly after paying out for raw materials etc.They will need less working capital.
For all businesses though they need to plan how much cash they are going to have.The best way of doing this is a CASH FLOW FORECAST.
WORKING CAPITAL CYCLE
From the above chart,it can be observed that the firm’s liquidity of a minifacturing firm depends an operating cycle involved in the conversion process from raw materials into finished goods and then sales into cash.
In case of non-maifacturing firms,the operating cycle will include the length of the time required to convert:
a)Cash into inventories
b)Inventories into debtors
c)debtors nto cash
To determine the operating cycle period,time lag associated with all the individual activities of working cycle are to be determined first.Then summing up all the
The way working capital moves around the business is modeled by the working capital cycle.This shows the cash coming into the business,what happens to it while the business has it and then where it goes.the term operating cycle otherwise known as “cash cycle”.In order to earn sufficient profits,a firm has to depend on its sales activities apart from others.The continuing flow from cash to suppliers,to investors,to debtors and back in cash.The time gap is technically termed as operating cycle.In other words,the duration of the time required to complete the following sequence of events,in case of a manufacturing firm,Is called operating cycle.
1)Conversion of cash into raw materials
2)Conversion of raw materials into work-in-progress
3)conversion of work-in-progress into finished goods
4)conversion of finished goods in debtors
5)conversion of debtors to cash
Bewteen each stage of this working capital cycle there is time delay.For some business this will be very long where it takes them a long time to make and sell the product.They will need a substantial amount of working capital to survive.Others though may receive their cash very quickly after paying out for raw materials etc.They will need less working capital.
For all businesses though they need to plan how much cash they are going to have.The best way of doing this is a CASH FLOW FORECAST.
WORKING CAPITAL CYCLE
From the above chart,it can be observed that the firm’s liquidity of a minifacturing firm depends an operating cycle involved in the conversion process from raw materials into finished goods and then sales into cash.
In case of non-maifacturing firms,the operating cycle will include the length of the time required to convert:
a)Cash into inventories
b)Inventories into debtors
c)debtors nto cash
To determine the operating cycle period,time lag associated with all the individual activities of working cycle are to be determined first.Then summing up all the