Differentiate between Cash Cycle and Operating Cycle. Explain their significance in value creation.

An operating cycle is the average time period between the acquisition of inventory and the receipt of cash from the inventory's sale. A short operating cycle means a more prompt return on investment for the firm's inventory. During an economic downtown, an operating cycle typically lasts longer than in periods of economic growth.

The cash cycle is the number of days required for a company to convert resources to cash flows. This measure calculates the time period during which each input dollar is committed to production and sales processes before it is converted to cash through the accounts receivable process. The cash conversion process gives insight into the financial stability of a company because it reflects the time period during which assets are committed to business processes and therefore are not available to invest to achieve even greater returns. As a result, the shorter the cash conversion cycle, the better.

The operating cycle measures the time between receiving inventory or raw materials and receiving cash for them.

The cash cycle measures the time between paying cash out for a variety of expenses and receiving cash into the business. For example, if a business makes and sells shoes, the operating cycle measures the time between receiving the materials to make the shoes and when someone buys a pair. The cash cycle measures the time between purchasing the materials to make the shoes and getting the money for the shoes.

The operating cycle and cash cycle by necessity overlap. The cash cycle may measure a longer period of time, as it begins measuring when materials are purchased rather than when they are received in the business' workshop. Both cycles use the date that cash comes back into the business as the end point of the cycle.

The operating cycle provides information for the business about how long it takes to make and sell finished products, while the cash cycle measures how profitable the business is. The cash cycle may be used when preparing financial statements to measure of how often cash flows into the business, and how much cash comes in relative to money going out for expenses.

Interactions

The cash cycle and operating cycle affect one another. If a business takes a long time to manufacture products to sell, it must keep inventory in stock for longer periods of time. Thus, the cash cycle may become longer due to purchasing more inventory if the operating cycle becomes longer. Similarly, if the operating cycle is short, business owners can concentrate on selling as much product as quickly as possible, which may make the cash cycle shorter and stronger.

Cash cycle- The beginning of the cash cycle occurs when you invest money in your business and purchase raw materials and other inputs to begin the production process. As long as the money is invested, it remains a part of the cash cycle.

Operating cycle- The beginning of the operating cycle kicks off when you purchase raw materials and pay wages and other expenses needed for production.

Operating cycles are important because they determine cash flow. If a company is able to keep a short operating cycle, its cash flow will consistent and the company won't have problems paying current liabilities. Conversely, long operating cycle means that current assets are not being turned into cash very quickly. In other words, cash is not being collected from customer very quickly.

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Money is tied up in inventory until it can be sold. As a result, cash invested in the inventory is not available for alternative uses. Maintaining a short operating cycle and cash conversion cycle are ways that businesses minimize inventory storage and depreciation costs and keep their liquidity high.

Operating Cycle

An operating cycle is the average time period between the acquisition of inventory and the receipt of cash from the inventory's sale. A short operating cycle means a more prompt return on investment for the firm's inventory. During an economic downtown, an operating cycle typically lasts longer than in periods of economic growth.

Cash Conversion Cycle

The cash conversion cycle is the number of days required for a company to convert resources to cash flows. This measure calculates the time period during which each input dollar is committed to production and sales processes before it is converted to cash through the accounts receivable process. The cash conversion process gives insight into the financial stability of a company because it reflects the time period during which assets are committed to business processes and therefore are not available to invest to achieve even greater returns. As a result, the shorter the cash conversion cycle, the better. "

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