Download - ITFT Operating cycle
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OPERATING CYCLE
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• A continuous process starting from payment of cash for purchasing raw material ,production , stocking , selling until obtaining money from debtors.
• It is a cycle involving—- conversion of cash into raw material > conversion of raw material into WIP > conversion of WIP into Finished goods> conversion of Finished goods into cash /debtors and > conversion of debtors into cash.
• Duration of Operating Cycle = Raw mat. period+WIP period +Finished goods period +Debtors collection period –Creditors payment period
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Maximization of share holder’s wealth of a firm is possibleonly when there are sufficient return from the operations
• Successful sales activity is necessary for earning profit salesdo not convert into cash immediately
• There is invisible time lap between the sale of good andreceipt of cash
• The time taken to convert raw material into cash is knownas operating cycle
• Conversion of cash into raw material
• Conversion of raw material into work in progress
• Conversion of Work in progress into finished goods
• Conversion of finished good into Sales ( Debtors and cash )
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Operating Cycle in
Manufacturing firmCash
Raw
MaterialsW I P
Finished
Goods
DebtorsSALES
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• The speed /time duration required to complete one cycle determines the requirements of working capital, longer the period of cycle larger is the requirement of working capital.
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Operating cycle of Non Manufacturing Firm
cash
Receivables
Stock of finished goods