Question

What are some of the characteristics of a firm with a long operating cycle? What are some of the characteristics of a firm with a long cash cycle? Provide examples of firms that are operating or have operated with these types of cycles and explain why they fit the characteristics.

Answer 1

Firm which have a long operating cycle will mean that firm will be taking a higher amount of time in order to produce a product and sell the product and receive the money out of the product so it will take a large amount of time in order to produce the product and it will include the production efficiency along with distribution efficiency and collection efficiency. These companies are likely to have higher amount of debt and high amount of inventories.

companies which have higher cash cycle will mean that these companies are having a poor collection policy from the debtors and it will also mean that these companies are paying their own debt very quickly so they are having a low amount of cash on their hands and low amount of liquidity.

Walmart was earlier operating with higher cash cycle and higher operating cycle as well but it has tried to reduce the operating cycle and cash cycle in order to enhance the profits of the company because these enlarged cycles wee leading to lowering of the profits of the company due to lagging of the time in a realisation of the cash so they were be lacking the liquidity as well. Hence it improved upon it and increased profits