What is Operating Cycle & Cash Cycle Definition & Calculations

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What is Operating Cycle & Cash Cycle Definition & Calculations

How can a business owner know how long it takes to make money on purchased supplies or products? In this lesson, we'll examine the two different methods for calculating the length of time it takes to make a profit: the operating cycle and the cash conversion cycle.

Lesson Summary
In Businesses have two ways of keeping track of how fast it takes them to make money on a purchase of supplies or products.

The first is the operating cycle, which is the best method to use if the company pays for their supplies or products at the time of the sale.

There are three basic steps in the operating cycle:
buying inventory with cash,
selling inventory for credit,
and receiving payment for sale.

The operating cycle can be calculated by adding the inventory period and the accounts receivables period.

If a business pays for their supplies and products with credit, it is best to use the cash conversion cycle, which is about converting the credit of the company into cash. That is, it looks at how long it takes the company to make money when they buy their inventory with credit.

The first three steps of the cash conversion cycle are just like those of the operating cycle.

But there's a fourth step in the cash conversion cycle: the company pays their suppliers for the inventory. The cash conversion cycle can be calculated by adding the inventory period and accounts receivables period and then subtracting the accounts payable period

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