EXPLAIN WHAT IS THE OPERATING CYCLE OF BUSINESS?

• Also called the Cash Operating Cycle of business

• This cycle normally involve five (5) stages starting from (i) the purchase of raw materials from suppliers, (ii) conversion of these raw materials into work-in-progress and then finally to finished goods; (iii) delivered and billed the finished goods to the customers; (iv) collect the money from the customers who have been billed and then (v) repay the creditors whom we earlier purchased the raw material.

• Very important as it represents the working capital cycle of the business

• Current Assets ( inventories, accounts receivable) and Current Liabilities ( accounts payables ) are part of these operating cycle

• Part of the Cash Conversion Cycle or Daily Working Capital mechanism. By reducing the number of days of this operating cycle, more funds can be retained by the business. Business often failed when this cash operating cycle prolonged unnecessarily. A profitable company is not necessary a cash rich or liquid company.