Operating Cycle Flashcards
Week 4 Objective 5
What is the “operating cycle”?
The elapsed time between the purchase of goods for resale (or purchase of materials to produce salable goods or services) and the collection of cash from customers. Typically a year or less.
Describe the “operating cycle” image.
How does the length of the operating cycle affect the business?
The length of the cycle can influence the classification of assets and liabilities on balance sheets. Also affects how income is managed.
What are some examples of cash management polices?
Delaying payments to suppliers, so a company can earn as much interest on their cash as possible
Speeding up collections from customers in order to invest the cash sooner or reduce need for additional financing
Earning the greatest return on excess cash
What is the first stage of the operating cycle and how does it affect cash management?
Buying inventory
Money that is tied up in inventory, sitting on shelves, is earning no return
Keep inventories levels low
What is the second stage of the operating cycle and how does it affect cash management?
Paying for the inventory
Delay payments as long as possible while maintaining a good relationship with the payee
The longer a company keeps its cash, the more interest it can collect
What is the third stage of the operating cycle and how does it affect cash management?
Selling inventory
Increase the speed of receivable collections
Some companies sell their receivables rather than wait to get paid by the customer (for less than they’d receive but gives them cash sooner and don’t have to hire employees to service the receivables)
What are short-term investments?
Business try to keep bank cash at a minimum as they receive low amounts of interest.
Short-term investments are purchased with temporary cash surplus
