Operating cycle

Operating cycle refers to a cycle from the first point at which a customer requests a price quotation to the final point at which payment is received from the customer for goods delivered. The operating cycle of a business generates funding needs, cash inflows and outflows- the cash conversion cycle- and potentially foreign exchange rate and credit risks.

Generally the operating cycle of a company is the average time or time period that it takes to purchase inventory, sell it on account, and then collect cash from customers.

According to L.J. Gitman,” The operating cycle of a firm is defined as the amount of time that elapses from the point when the firm inputs material and labour into the production process to the point when cash is collected from the sales of finished product that contains these production inputs.”

According to Ross, Pesterfield and Jordan,” The time period between the acquisition of inventory and the collection of cash from receivables is called operating cycle.”

Operating Cycle is the length of time taken by a firm to produce its final product, sell it to customers, and collect proceeds of the sale in cash.

Share it:  Cite

More from this Section

  • Drawee
    Drawee is the individual or entity on whom a draft is drawn. ...
  • Life annuity with guaranteed payments
    Life annuity with guaranteed payments refer pays a life income to the annuitant with a ...
  • Interest Rate Cap
    An interest rate cap is an option to fix a ceiling or maximum short-term interest-rate ...
  • Capital retention approach
    Capital retention approach is a method used to estimate the amount of life insurance to ...
  • Excess insurance
    Excess insurance under an excess insurance plan, the insurer does not participate in the ...