Can you explain the factors that influence the operating cycle?

Operating cycle is a tool for calculating company profitability.

The influencing factors are;

1) The payment terms

2) The order fulfillment policy

3) The credit policy

Cash, inventory and accounts receivable. These three factors impact the operating cycle. Length of operating cycle depends upon policies and varies as per desired objective. How? Time to convert inventory into sales, period for collection of money and time to pay money to suppliers.

The operating cycle in a business depends on the working capital requriements for that busienss. Some of the factors effecting the operating cycles are:

 Nature of business: the operating cycle length tends to be less in a retail business, since       the working capital required is less.

Payment terms extended to the company by its suppliers. Longer payment terms shorten the operating cycle, since the company can delay paying out cash.

The credit policy and related payments terms. If the company follows a strict or short term credit policy, it can manage with less working capital.d

The order fulfilment policy, since a higher assumed initial fulfilment rate increase the amount of inventory on hand, which increase the operating cycle.

In case of inflation, the price of raw materials and cost of labour will increase, which means an increase in the required working capital and the operating cycle length.

External Factors:

- Health Vendor contracts

- Timing of procurement coordination between vendors & site consumption requirement to avoid unwanted inventory build-up.

- Timely collections

Internal factors:

- Optimized inventory management and clear tracking of goods from precurement to final site consdumtion

- Optimized procurement cycle protecting company's and vendor network interest for long term pricing strategy.

The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. This is useful for estimating the amount of working capital that a company will need in order to maintain or grow its business.

Operating cycle is the matching of both cash flows and availability of working capital,

Following factors that influence the operating cycle,

1. Increase the payment terms of creditors,

2. Back to back payment terms

3. Days Credit Sales Outstanding (DCSO) etc,

OPERATING CYCLE ARE TOTALLY DEPENDS ON THE COMPANY'S WORKING CAPITAL MANAGEMENT POLICY.

LESSER THE DEBTOR COLLECTION PERIOD AND GREATER THE CREDIT PERIOD FOR CREDITOR IS AN INDICATION OF GOOD WORKING CAPITAL MANAGEMENT.

1. The payment terms extended to the company by its suppliers
2. The credit policy and related payment terms
3. Seasonality of operation
4. technology & production 
5. business cycle flactuation
6. availability of raw materials

Yes! These are as follow:

Size of Business, Nature of Business (Trading or Manaufacturing), Storage Time of processing Period, Credit Policy & Credit Tenor, Seasonal Requirements, Potential Growth or Expansion of Business, Change in Price Level, Withdrawals/Devidends, Access to Money Market, Working Capital Cycle and operating efficency.

The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. This is useful for estimating the amount of working capital that a company will need in order to maintain or grow its business.

A company with an extremely short operating cycle requires less cash to maintain its operations, and so can still grow while selling at relatively small margins. Conversely, a business may have fat margins and yet still require additional financing to grow at even a modest pace, if its operating cycle is unusually long. If a company is a reseller, then the operating cycle does not include any time for production - it is simply the date from the initial cash outlay to the date of cash receipt from the customer.

The following are all factors that influence the duration of the operating cycle:

• The payment terms extended to the company by its suppliers. Longer payment terms shorten the operating cycle, since the company can delay paying out cash.
• The order fulfillment policy, since a higher assumed initial fulfillment rate increases the amount of inventory on hand, which increases the operating cycle.
• The credit policy and related payment terms, since looser credit equates to a longer interval before customers pay, which extends the operating cycle.

Thus, several management decisions (or negotiated issues with business partners) can impact the operating cycle of a business. Ideally, the cycle should be kept as short as possible, so that the cash requirements of the business are reduced.

Examining the operating cycle of a potential acquiree can be particularly useful, since doing so can reveal ways in which the acquirer can alter the operating cycle to reduce cash requirements, which may offset some or all of the cash outlay needed to buy the acquiree.

FACTORS:

Length of operating cycle

Nature of Business

Scale of Operation

Business Cycle fluctuations

Seasonal factors

Technology and Production Cycle

Credit Allowed

Credit Avail

Operating Efficiency

Raw Material Availibility

Level of Competition

Inflation

Growth prospects

Factor affecting operating cycle are

1) Days Credit Sales Outstanding (DCSO)

2) Payment terms