StudentShare solutions
Triangle menu

The difference between the firm's operating cycle and its cash conversion cycle - Essay Example

Nobody downloaded yet

Extract of sample
The difference between the firm's operating cycle and its cash conversion cycle

It would only include time for the initial payment of cash by the company and the receipt of cash from the customers. Operating cycles are either short or long and both of these have serious implications for the company. An operating cycle which is short would mean that the company`s return on investment is rapid. A longer operating cycle, on the other hand, means that the company is not getting a quick return on investment and this probably affect the company in the long run. Operating cycles also differ according to the nature of the economy. If there is an economic downturn, then the operating cycle of a company would probably last longer than the one during a period of an economic growth. The operating cycle of a company is also helps in the estimation of the amount of the working capital required by the company to maintain its growth. There are a number of factors influencing the duration or the time period of the operating cycle and these include the payment terms extended to the company by its suppliers. Also, a higher order fulfillment policy would increase the duration of the operating cycle. The credit terms and payment policies of the company also affect the time period of the operating cycle. Therefore, operating cycles of a company are often affected the policies and decisions of a company as well as the policies of other companies towards the said company. The cash conversion cycle of a company is the time period required for a company to convert its resources cash flows. This cycle shows the time, in days, which a company takes to sell inventory, collect its receivables as well as pay all its bills. This process of cash conversion shows the financial position of the company during a certain period of time. The cash conversion ratio is calculated through the collection of three ratios which are related to the inventory turnover which is the accounts receivable. This cycle shows how long an investment is in the production stage before being turned into cash. This cash conversion cycle is also known as the net operating cycle of a company. A company`s cash conversion cycle lengthens when it takes a longer time in collecting its accrued payments. For small businesses especially, longer cash conversion cycles show the difference between its profits and bankruptcy as these companies highly rely on cash from such sales of inventories. One of the major differences between an operating and a cash conversion cycle is the difference in the calculation of both of these. In order to calculate the operating cycle, the duration of each component of the operating cycle needs to be determined and this includes raw materials, finished goods, work in progress etc. the operating cycle is found out by summing these individual components. The requirement for working capital would be higher if the operating cycle is longer. On the other hand, cash conversion cycle is calculated using the days payable outstanding ratio as well as those elements used in the operating cycle calculation. The days payable outstanding is the average time taken by a company to pay its suppliers. The formula for cash conversion is days inventory outstanding + days sales outstanding – days payable outstanding. All of these activity ratios are expressed in days and show the cash conversion cycle of the company. Both operating cycles and cash conversion cycles are really important for an owner as well as the company as the whole. The cash conversion cycle is extremely important for the financial analysis being done by the owner. This is because it shows the factors related to cash which is really important ...Show more


An operating cycle of a company is the average period of time which a business takes for the acquisition of goods and the receipts of cash due to sale of these goods. …
Author : terrill94
The difference between the firms operating cycle and its cash conversion cycle
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"The difference between the firm's operating cycle and its cash conversion cycle"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Business cycle
5 Compare and contrast the recession of 1981-1982 with the recession of 2007-2009 6 Identify a major difference between the 1981-1982 recession and the 2007-2009 recession 7 What specific fiscal policies to help the economy recover from the recessions of 1981-1982 and 2007-2009 7 Compare and contrast Real GDP, Unemployment, Employment and Inflation of the 1981-1982 8 Works Cited 8 Business cycle Business cycle refers to fluctuations in the economic activity that occurs in a recurring manner.
5 pages (1250 words) Essay
Relationship Between Project Life Cycle and Product System Life Cycle
These phases are extremely useful in planning a project since they provide a framework for budgeting, manpower and resource allocation, and for scheduling project milestones and project reviews.'[2]. The project basically consists of the initiation, planning, development, implementation and closeout phases.
2 pages (500 words) Essay
News Cycle
Thereafter internet came into exist and now there is immense competition going on between cable news networks' and internet in order to provide the news and information at the same moment as it happens. Moreover cable news networks' were trying to report live telecasts as far as possible to attain upper hand in the media industry.
7 pages (1750 words) Essay
Accounting cycle
These transactions are entered into a journal first. This business transaction can be selling of goods, buying of stock or any other business activity. A journal has specialized format containing debit and credit column.
2 pages (500 words) Essay
What is the difference between the firm's operating cycle and its cash conversion cycle Which would be more important to you as a owner and why
It would only include time for the initial payment of cash by the company and the receipt of cash from the customers. Operating cycles are either short or long and both of these have serious
3 pages (750 words) Essay
Firm's Operating Cycle vs Cash Conversion Cycle
We determine the “length of time taken in the production process, that includes; time for acquiring raw materials, work-in-process, finished goods and bills receivable. Next, calculate the aggregate
3 pages (750 words) Essay
Menstual Cycle
This flow lasts for four to six days. There are two main parts of the menstrual cycle that is the ovarian and uterine cycle. This paper will critically discuss the normal response of ovaries during the menstrual cycle, as well as the hormones secreted and
1 pages (250 words) Essay
Calculating the cash conversion
The primary purpose of the process of cash conversion is to provide insight into the company’s financial stability because it indicates the period of time during which assets are committed to business (Brigham & Ehrhardt, 2008). Therefore, the cash is not
1 pages (250 words) Essay
Business cycle
This implies that the model uses real-business concepts against empirical values to ascertain the various sequences in the data. Calibration imposes
2 pages (500 words) Essay
Refrigeration cycle
However, they may not be in a position to realize that air conditioners are also refrigeration systems. In fact, the two refrigeration types are both vapor compression refrigeration. This paper delves the
2 pages (500 words) Essay
Comments (0)
Click to create a comment
Let us find you another Essay on topic The difference between the firm's operating cycle and its cash conversion cycle for FREE!
Contact us:
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
Join us:
Contact Us