Operating cycle

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Operating cycle
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The term of operating cycle (otherwise you can call it the cash cycle [1]) was defined as the time between the sale of manufactured goods and the receipt of payment for it. For an enterprise, the operating cycle begins with the moment when company buying stocktaking and supply goods and finish when the customer transfer money for purchased cargo[2]. The operating cycle is a necessary transaction if the company wants to sell goods to customers and charge payment for this [3]. The duration of the operating cycle depends on the type of business. However, it usually lasts a calendar year, i.e. it starts on the first of January and ends on December 31[4]. Various branches of industry could have different cycle length like for an exapmle this cycle in fashion industry cannot be too long and usually takes maximum 6 months but on the other hand in the maschine industry or ship manufacturing it could be two or three years. Each branch of industry has its own unique factors that influence the duration of the operating cycle [5].

Stages of Operating cycle

The operating cycle includes[6]:

  • First of all the company is processing on raw material inventory,
  • Second stage is packing and storage in warehause
  • The next one includes finished goods,
  • In fourth point companies sold that goods on credit,
  • Next stage includes accounts receivable,
  • After that the company receive payment for clients,
  • The next step in operating is getting cash from the customer,
  • The last one stages is about buying again raw material and repeat this cycle from scratch.

Use of the Operating cycle

Thanks to this cycle, each company has the ability to control the companies earnings and expenses. By observing the operating cycle, the company can analyze the cost structure and take preventive measures when something goes wrong in individual cycles [7]. Observation of subsequent cycles gives the opportunity to improve the next ones. Thanks to this, we companies also avoid mistakes that occurred in previous cycles and improve the entire process. The operating cycle is also useful when one of the companies want to compare its revenues and costs with the situation in another company with a similar business profile [8]. As the duration of operating cycles can differ many companies adjust their cycle to the calendar year which gives them a clear view of the net profit they earned in a given year. However, for some enterprises it would be more adequate to adjust their cycle to the seasonable earnings as for an example a ski resort would be more interesed in how much income they made during winter season which includes the turn of two years. A business operating in similar way, would start its cycle from first day of July and ending with the last day of June next year [9].

Footnotes

  1. Khan M.Y, Jain P.K (2017) Financial Management, McGraw Hill Education, p.13-9
  2. Porter G.A, Norton C.L (2012) Financial Accounting: the Impact on Decision Makers, South-Western, p. 61
  3. Koester E. (2009) What every Engineer Should Know about starting a high-tech business Venture, CRC Press, p. 473
  4. Berry A. (1999) Financial Accounting: An Introduction, Cengage Leearning EMEA, p. 69
  5. Camillus J. (1998) Strategic Planning and Management Control: Systems for Survival and Success, Lexington Books, p.168
  6. Ramachadran N, Kakanu R.K (2005) Fiancial Accounting of Management, Tata McGraw-Hill Education, p. 46
  7. Awasthi D, Jaggi R, Padmanand V (2006) A Manual for Entrepreneurs: Food Processing Industry, Tata McGraw-Hill, New Delhi, p.175
  8. Gibson CH.H (2012) Financial Reporting and Analysis: Using Financial Accounting Inforamtion, South-Western Cengage Learning, p. 219
  9. Koester E. (2009) What every Engineer Should Know about starting a high-tech business Venture, CRC Press. p.473

References

Author: Aleksandra Wróbel