The most liquid asset is cash in hand and cash at bank. The time required to complete the following cycle of events in case of a manufacturing firm is called the cash conversion cycle or the operating cycle.
- Conversion of cash into raw materials
- Conversion of raw materials into work in process
- Conversion of work in process into finished goods
- Conversion of finished goods into debtors and bills receivables through sales
- Conversion of debtors and bills receivables into cash
Operating cycle in case of a trading firm consists of following events
- Cash into inventories
- Inventories into accounts receivable
- Accounts receivable into cash
Service and financial firms has the operating cycle consisting of
- Conversion of cash into debtors
- Conversion of debtors into cash