Cash Operating Cycle

Cash operating cycle is the length of time between company’s outflow of material, wages and other expenditure and inflow of  cash from the sales of goods. It reflects a company’s investment in working capital. The faster the cycle, lower is the investment in working capital. The investment increases from raw material to labour, OH, WIP upto final collection of cash from trade receivables.

Calculation of cash operating cycle:

For manufacturing business cash operating cycle is calculated as:

Raw material  period                                                             X

Add: WIP period                                                                          X

Add: Finished good period                                                            X

Add: Receivables collection period                                                X

Less: Payables payment period                                                     (X)

Cash Operating cycle                                                 X

Note: For retail business there is no raw material and WIP  holding period.

The length of cycle depends upon balancing liquidity and profitability. Shortening cash cycle may have an adverse effect on sales because customers buy from that supplier who gives more credit period so there should be an optimum level of cash operating cycle.