Question

Discuss the operating and cash cycles and why they are important for a financial manager to have a good understanding of how cash and operating cycles impact business operations.

Answer 1

Operating Cycle- It is the time period in which company produces goods and services and sells them and receives cash inflow in return. This cycle tells how fast company converts the raw material into finished product and makes it sellable in the market. If company has shorter operating cycle, it indicates that company will have availability of cash as the cash is not stuck in the operations.

Cash Cycle- It is a period in which company sells its products and generates cash. Cash cycle tells how fast a company receives the payment from customers. Shorter cash cycle is good for business. When customers make early payments, company has to borrow less.

Importance of Operating and Cash cylce in the business- This is very important to know how much time company takes to convert its inventory into sale and sale into cash inflow. Shorter cycles are good for business. Sometimes cash cycle can be negative also it shows that company's business model is not good and it has to be changed. Operating and cash cycle are important in taking managerial decisions. Company needs less working capital if its operating and cash cycles are shorter.