Firm's Operating Cycle vs Cash Conversion Cycle Essay

Firm's Operating Cycle vs Cash Conversion Cycle - Essay Example duration of the cycle by adding together each of these elements.† An greater operating cycle implies that the business will need more working capital and with high working capital will lead to high inventory-carrying cost, this is inclusive of interest payments, thus the firm has greater opportunity cost because it is incapable to invest its funds in high fund investments projects. It is thus advisable to have low operating cycles because there will be more completed cycles in a year, this will lead the business to make greater gross and net profits annually. This is the time (number of days) interval between the time a firm purchases an inventory until the inventory is sold and cash is received from the buyer (accounts recoverable). In other words it is the total time taken by a firm or a business to covert purchases into cash from consumers of the product. Cash conversion process gives imminent into the financial stability of a company, this is because it gives time period during which assets are committed to business processes and therefore are not available to invest to achieve even greater returns. The little the time period to collect cash from sales made in credit the better for the firm, this is because; for a shorter cycle gives the business quick asses to cash, the cash can be used by the business to purchase additional stock or may be used to pay debt to suppliers of the firm. It is therefore of great significance for a firm to have systems that facilitates shorter conversation cycles. This is achieved by speeding the customers to pay up their debts while the firm slows down payments to its suppliers. Cash conversation cycle can also be negatively used by large organization that have a huge market command share whereby they change the payment days to supplies anyhow. The model that a firm’s management adopts is very crucial for achievement of the firm’s final profits. When an organization allows short interval of its operating cycle it means