A Business will typically need working capital when its operating cycle is too long. The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. If a company is a retailer, then the operating cycle does not include any time for production: it is simply the date from the initial cash outlay to the date of cash receipt from the customer. Working Capital.
If this is the case, then the business will need approximately 60 days of working capital to pay its creditors. The operating cycle is useful for estimating the amount of working capital that a company will need in order to maintain or grow its business.
A company with an extremely short operating cycle requires less cash to maintain its operations, and so can still grow while selling at relatively small profit margins. Conversely, a business may have high margins and yet still require additional financing to grow even if its operating cycle is somewhat long. Post Licensing Procedures for newly established entities. Doing Business - Vietnam. Click here to view all issues of RBI Magazine.
Dong Da district, Hanoi, Vietnam. Member of Russell Bedford International , with affiliated offices worldwide. Home Services News Careers Contact. Operating cycle and cash flow Cash in the form of bank deposits or cash-on-hand is a type of short-term liquid assets of companies. Upload your resume. Sign in. Career Development. What is an operating cycle? Obtaining raw material Producing goods Having finished goods Having receivables from making a sale Obtaining cash receiving payment from customers.
Why is the operating cycle important? How to determine an operating cycle. Determine the inventory period. Determine the company's accounts receivable. Calculate the operating cycle. Tips for shortening a company's operating cycle. Implement a stricter credit policy: Customers are more apt to pay for their purchase on time if companies have a stricter credit policy.
Reduce the time period on payment terms: The quicker a company is able to collect accounts receivables, the shorter their operating cycle is likely to be. Quickly sell a company's inventory: The quicker a company sells its inventory, the shorter its operating cycle should be. Examples of operating cycles. Read More Domain vs. URL: Definitions and Differences.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways The cash conversion cycle CCC is a metric that expresses the length of time in days that it takes for a company to convert its investments in inventory and other resources into cash flows from sales. This metric takes into account the time needed to sell its inventory, the time required to collect receivables, and the time the company is allowed to pay its bills without incurring any penalties.
CCC will differ by industry sector based on the nature of business operations. What does the cash conversion cycle measure? What is the CCC formula? What does the cash conversion cycle say about a company's management?
How does inventory turnover affect the cash conversion cycle? Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Working Capital Management Definition Working capital management is a strategy that requires monitoring a company's current assets and liabilities to ensure its efficient operation.
Understanding Days Sales Outstanding Days sales outstanding DSO is a measure of the average number of days that it takes for a company to collect payment after a sale has been made.
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