The operating cycle is the duration of the period from the moment of receipt of raw materials and materials to the enterprise until the receipt of revenue from the products sold – goods, works, services. The operating cycle shows when the company turns raw materials into revenue from the sale of products. It allows determining the position of an enterprise in the industry, the change in its solvency, and financial status. The calculation is based on the cost of production, as well as accounts receivable and inventory. The reduction of the operating cycle indicates a decrease in the company’s profit.
The cash cycle characterizes the time in days that passes from the moment of payment for raw materials and materials to the receipt of payment for the products sold. This is the period during which the funds are in the form of working capital. Jalal and Khaksari (2019) state that the cash cycle indicator is widely used by companies to understand and manage their short-term financial needs. The duration of the cash cycle determines the company’s need for working capital. An increase in the cash cycle indicates that the company has problems with the turnover of goods or with the return of receivables.
A financial manager needs to understand how monetary and operational cycles affect business processes because any enterprise needs money. It provides an opportunity to develop products or employees and thereby influence the profitability and success of the company as a whole. The duration of the operating cycle directly affects the profit – the shorter it is, the higher the profit. The money cycle should be as fast as possible, so the company’s owner will have to attract fewer additional funds.
Reference
Jalal, A., & Khaksari, S. (2019). Cash cycle: A cross‐country analysis. Financial Management, 49(3), 1-37. Web.