Operating Cycle

The Operating Cycle of a business is the length of time between the cash outflow on purchased material and cash inflow from the sale of goods. The Operating Cycle determines the amount of working capital that a business requires to operate on a day-to-day basis. The shorter the Operating Cycle the lower the amount of working capital required for the business and the greater opportunity for investments in other value-adding activities.

The Operating Cycle for a manufacturing based business can involve many stages, namely:

1. Purchase - the receipt of raw materials from suppliers on account.
2. Conversion - the conversion of these raw materials into finished goods
3. Inventory - the holding and storage of raw materials, Work-In-Progress (WIP) and Finished Goods.
4. Payment - the payment of the supplier's account for the raw materials received earlier.
5. Sale - the sale of finished goods to customers on account
6. Collection - the collection of money from these customers in payment of their account