OPERATING CYCLE

• 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

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 )

Operating Cycle in

Manufacturing firmCash

Raw

MaterialsW I P

Finished

Goods

DebtorsSALES

• 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.

Operating cycle of Non Manufacturing Firm

cash

Receivables

Stock of finished goods