Operating cycle

Operating cycle

The operating cycle may be defined as time duration starting from the procurement of goods or raw materials ending with the realization of sales. The length and nature of operating cycle may differ from one firm to another depending upon the nature and size of the firm. The working capital requirement of the firm depends upon the operating cycle of the firm.
The operating cycle of the firm consist of the time required for the completion of the chronological sequences of some or all of the following:
1. Procurement of the raw materials and the services
2. Conversion of the raw materials into work in progress
3. Conversion of work in progress into the finished goods
4. Sale of the finished goods
5. Conversion of the receivables into the cash
Operating cycle period: The length or the time duration of the operating cycle of any firm can be defined as the sum of its inventory conversion period and the receivable conversion period.
1. Inventory conversion period: It is the time required for conversion of raw material into saleable finished goods. In the manufacturing firm the inventory conversion period is consisting of raw material conversion period, work in progress conversion period, the finished goods conversion period. Raw material conversion period refers to the period for which the raw material is generally kept in the store before it is issued to the production department.
2. Receivable conversion period: It is the time required to convert the credit sales into cash realization. It refers to the period between the occurrence of credit sales and collection from debtors.
The total inventory conversion period and receivable conversion period is also known as total operating cycle period. The firm might be getting some credit facilities from the supplier of the raw materials, wage earners, etc. this period for which the payments to these parties are deferred or delayed is known as deferral period.

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