Please describe the operating cycle. Give examples?
Operating cycle of a firm begins with the acquisition of materials and ends with the collection of the receivables by selling the finished goods. It has four components: Cash, Inventory, Bills Payable, Bills Receivables.
Operating cycle = + accounts payable (in days) -inventory replacement (in days) - accounts receivable (in days)
Example 1: You get 14 days of credit from your suppliers. It takes 21 days to sell your merchandise. You have an all cash business. How long is your operating cycle?
Ans. Operating cycle = + 14 (accounts payable in days) -21 (inventory replacement in
Days) -0 (accounts receivable in days).
Operating cycle= -7 days
A negative operating cycle means you need to pay your bills before your customers pay you. As your sales volume increases, you will need more cash to keep up with your bills. Unless you are able to invest more cash, you limit your business's ability to grow. Most businesses have negative operating cycle.
Example 2: You get 30 days of credit from you suppliers. It takes only 14 days to sell your merchandise. You give 14 days of credit. How long is you operating cycle?
Ans. Operating cycle =+ 30 (accounts payable in days) -14 (inventory replacement in days) -14 (accounts receivable in days) Operating cycle=+ 2 days
A positive operating cycle means that you can increase sales without needing additional cash. Beware, however, that your suppliers can disrupt your business by changing their credit policy.
Operating cycle of a firm begins with the acquisition of materials and ends with the collection of the receivables by selling the finished goods. It has four components: Cash, Inventory, Bills Payable, Bills Receivables.
Operating cycle = + accounts payable (in days) -inventory replacement (in days) - accounts receivable (in days)
Example 1: You get 14 days of credit from your suppliers. It takes 21 days to sell your merchandise. You have an all cash business. How long is your operating cycle?
Ans. Operating cycle = + 14 (accounts payable in days) -21 (inventory replacement in
Days) -0 (accounts receivable in days).
Operating cycle= -7 days
A negative operating cycle means you need to pay your bills before your customers pay you. As your sales volume increases, you will need more cash to keep up with your bills. Unless you are able to invest more cash, you limit your business's ability to grow. Most businesses have negative operating cycle.
Example 2: You get 30 days of credit from you suppliers. It takes only 14 days to sell your merchandise. You give 14 days of credit. How long is you operating cycle?
Ans. Operating cycle =+ 30 (accounts payable in days) -14 (inventory replacement in days) -14 (accounts receivable in days) Operating cycle=+ 2 days
A positive operating cycle means that you can increase sales without needing additional cash. Beware, however, that your suppliers can disrupt your business by changing their credit policy.
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