StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...

The difference between the firm's operating cycle and its cash conversion cycle - Essay Example

Cite this document
Summary
An operating cycle of a company is the average period of time which a business takes for the acquisition of goods and the receipts of cash due to sale of these goods. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER98.4% of users find it useful
The difference between the firms operating cycle and its cash conversion cycle
Read Text Preview

Extract of sample "The difference between the firm's operating cycle and its cash conversion cycle"

Download file to see previous pages

It would only include time for the initial payment of cash by the company and the receipt of cash from the customers. Operating cycles are either short or long and both of these have serious implications for the company. An operating cycle which is short would mean that the company`s return on investment is rapid. A longer operating cycle, on the other hand, means that the company is not getting a quick return on investment and this probably affect the company in the long run. Operating cycles also differ according to the nature of the economy.

If there is an economic downturn, then the operating cycle of a company would probably last longer than the one during a period of an economic growth. The operating cycle of a company is also helps in the estimation of the amount of the working capital required by the company to maintain its growth. There are a number of factors influencing the duration or the time period of the operating cycle and these include the payment terms extended to the company by its suppliers. Also, a higher order fulfillment policy would increase the duration of the operating cycle.

The credit terms and payment policies of the company also affect the time period of the operating cycle. Therefore, operating cycles of a company are often affected the policies and decisions of a company as well as the policies of other companies towards the said company. The cash conversion cycle of a company is the time period required for a company to convert its resources cash flows. This cycle shows the time, in days, which a company takes to sell inventory, collect its receivables as well as pay all its bills.

This process of cash conversion shows the financial position of the company during a certain period of time. The cash conversion ratio is calculated through the collection of three ratios which are related to the inventory turnover which is the accounts receivable. This cycle shows how long an investment is in the production stage before being turned into cash. This cash conversion cycle is also known as the net operating cycle of a company. A company`s cash conversion cycle lengthens when it takes a longer time in collecting its accrued payments.

For small businesses especially, longer cash conversion cycles show the difference between its profits and bankruptcy as these companies highly rely on cash from such sales of inventories. One of the major differences between an operating and a cash conversion cycle is the difference in the calculation of both of these. In order to calculate the operating cycle, the duration of each component of the operating cycle needs to be determined and this includes raw materials, finished goods, work in progress etc.

the operating cycle is found out by summing these individual components. The requirement for working capital would be higher if the operating cycle is longer. On the other hand, cash conversion cycle is calculated using the days payable outstanding ratio as well as those elements used in the operating cycle calculation. The days payable outstanding is the average time taken by a company to pay its suppliers. The formula for cash conversion is days inventory outstanding + days sales outstanding – days payable outstanding.

All of these activity ratios are expressed in days and show the cash conversion cycle of the company. Both operating cycles and cash conversion cycles are really important for an owner as well as the company as the whole. The cash conversion cycle is extremely important for the financial analysis being done by the owner. This is because it shows the factors related to cash which is really important

...Download file to see next pages Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“The difference between the firm's operating cycle and its cash Essay”, n.d.)
The difference between the firm's operating cycle and its cash Essay. Retrieved from https://studentshare.org/finance-accounting/1465534-what-is-the-difference-between-the-firm-s
(The Difference Between the firm'S Operating Cycle and Its Cash Essay)
The Difference Between the firm'S Operating Cycle and Its Cash Essay. https://studentshare.org/finance-accounting/1465534-what-is-the-difference-between-the-firm-s.
“The Difference Between the firm'S Operating Cycle and Its Cash Essay”, n.d. https://studentshare.org/finance-accounting/1465534-what-is-the-difference-between-the-firm-s.
  • Cited: 0 times

CHECK THESE SAMPLES OF The difference between the firm's operating cycle and its cash conversion cycle

Measures of Working Capital Management Efficiency and Their Relationship to Corporate Profitability

hellip; The continuing flow of cash from suppliers to inventory to accounts receivable and back into cash is usually referred to as the cash conversion cycle.... The cash conversion cycle (CCC) is an additive measure of the number of days funds are committed to inventories and receivables less the number of days payments are deferred to suppliers.... Gentry, Vaidyanathan, and Lee (1990) developed a modified version of the CCC called the Weighted cash conversion cycle (WCCC), which scales the timing by the amount of funds in each step of the cycle....
4 Pages (1000 words) Essay

Financial Management Discussion

These abnormalities affected the cash conversion cycle and average age of inventory.... are sources of financing for short period of one year or less than that; and net working capital is difference between current assets and current liabilities. Working capital Profitability is the difference between revenue and costs generated by both current and fixed assets during normal business activities.... With the result operating cycle period started getting longer; and thereby...
13 Pages (3250 words) Essay

Managing Working Capital: It Depends upon the Type of Business

urrent assets of the company are considered working capital and 'net working capital is the difference between current assets and liabilities' (Lawrence J Gitman, page 628)2.... he two main characteristics of current assets are that their life period is short (say up to an operating cycle), and secondly current assets are transformed from one current asset to the other in order to achieve a trade-off between profitability and risk.... nbsp; … Working Capital Management 'is to manage each of the firm's current assets and current liabilities to achieve a balance between profitability and risk that contributes positively to the firm's value....
8 Pages (2000 words) Coursework

Management of Working Capital

It also outlines the working capital cycle, methods of managing working capital, working capital management in UK companies, and gives recommendations on the improvement of liquidity the companies.... A discussion relating to the working capital cycle, methods of managing working capital, working capital management in UK companies, and suggestions for improvement has been presented below.... The pattern of all the above components of working capital varies with the business cycle....
6 Pages (1500 words) Coursework

Working Capital Management - Cytec Industries

The cash conversion cycle measures the cash to cash cycle.... The measure of the time taken for employment of cash to earn cash is the cash conversion cycle.... A longer cycle is significant of longer collection periods, which implies a slow cash conversion cycle.... It is the difference between short term assets/ current assets and short term liabilities/ current liabilities.... A longer cycle time means that a company takes long time to convert its current assets....
12 Pages (3000 words) Essay

Working Capital Management for WPRT

In which net working capital is the difference between current assets and current liabilities.... Working capital is the firm's investment in short-term assets such as cash, marketable securities, accounts receivable and inventories.... Even if a company experiences a loss it should maintain its dividend since some Stable dividend also creates a platform for investment of other companies with that particular firm.... This means that the two are directly proportionate, hence a firm pays dividend according to its ability at that particular time....
4 Pages (1000 words) Essay

Corporate Finance: Cables & Wires Plc

The liquidity position of Cables and Wires Plc was very delicate in 2007 with its current ratio at 0.... This situation worsened in 2008 when its current ratio came down to 0.... hen an entity uses different types of debt capital, its cost of total debt capital may be calculated by averaging the different costs calculated as under For the sake of convenience in absence of a secondary market for a bank loan, the book value of debts are treated as market value for averaging the costs:Equity capital of Cable and wireless as per its balance sheet as at 31 March 2008 (Annual Return 2008) I consist of issued capital and retained earnings....
6 Pages (1500 words) Assignment

The Concept of Policy Cycle

The paper “The Concept of Policy cycle” presents the intricacy and variety of policy-making procedures and actors while offering a common background for their comparison.... nbsp;   … The Encyclopedic Dictionary of Public Administration defines policy cycle as the pattern presented by steps that finally lead to the formulation of a public policy.... Lester and Stewart define policy cycle as a conveyor belt where issues are first identified as a challenge, subsequent courses of action deliberated on, and policies formulated, implemented, improved, and eventually terminated due to their successes or lack of it....
13 Pages (3250 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us