Question

Describe the operating cycle and cash cycle. What are the differences?

Answer 1

Operating Cycle:

An operating cycle is the measure of time an organization spends between burning through cash operating exercises and gathering cash from the same operating activity. A producer's operating cycle may begin when the organization burns through cash on crude assembling materials to make an item. The operating cycle wouldn't end until the point when the items are created and sold to retailers or wholesalers.

Operating Cycle = Days' Sales of Inventory + Days Sales Outstanding

Cash Conversion Cycle:

The cash conversion cycle is a cash flow computation that endeavors to quantify the time it takes an organization to change over its interest in inventory and other asset contributions to cash. As it were, the cash conversion cycle figuring measures to what extent cash is tied up in inventory before the inventory is sold and cash is gathered from clients.

Cash conversion cycle = Days inventory outstanding + Days Sales outstanding – Days payables outstanding

DIFFERENCES OPERATING CYCLE CASH CONVERSION CYCLE

An operating cycle is the normal day and age between the procurement of inventory and the receipt of cash from the inventory's deal. A short operating cycle implies a more provoke degree of profitability for the association's inventory. Amid a monetary downtown, an operating cycle regularly endures longer than in times of financial development.

The cash conversion cycle is the quantity of days required for an organization to change over assets to cash flows. This measure ascertains the day and age amid which each info dollar is focused on generation and sales forms before it is changed over to cash through the records receivable process.

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