Consequence of the cash operating cycle, Financial Management

Assignment Help:

Q. Consequence of the cash operating cycle?

The cash operating cycle is the length of time among paying trade payables and receiving cash from receivables. It is able to be calculated by adding together the average inventory holding period and the average receivables' deferral period and then subtracting the average payables' deferral period. The inventory holding period perhaps subdivided into the holding periods for raw materials work-in-progress and finished goods. In words of accounting ratios the cash operating cycle is able to be approximated by adding together inventory days and receivables days (receivables' ratio) and subtracting payables days (payables' ratio). If payables are paid prior to cash is received from receivables the cash operating cycle is positive if receivables pay before trade payables are paid the cycle is negative.

The consequence of the cash operating cycle in determining the level of investment in working capital is that the longer the cash operating cycle the higher the investment in working capital. The length of the cash operating cycle differ among industries for instance a service organization may have no inventory holding period a retail organization will have a inventory holding period based almost entirely on finished goods and a very low level of receivables and a manufacturing organization will have a inventory holding period based on raw materials work-in-progress and finished goods. The stage of investment in working capital will thus depend on the nature of business operations.

The cash operating cycle as well as the resulting level of investment in working capital does not depend only on the nature of the business however. Companies within the similar business sector may have different levels of investment in working capital measured for example by the accounting ratio of sales/net working capital as a result of adopting different working capital policies. A moderately aggressive policy on the level of investment in working capital is characterized by lower levels of inventory and receivables this lower level of investment raises profitability but also increases the risk of running out of inventory or of losing potential customers due to better credit terms being offered by competitors. A moderately conservative policy on the level of investment in working capital has higher levels of investment in inventory and receivables: profitability is consequently reduced but the risk of stock-outs is lower and new credit customers may be attracted by more generous terms.

It is as well possible to reduce the level of investment in working capital by reducing the length of the cash operating cycle. This is achieved by decreasing the inventory holding period (for example by using JIT methods) by reducing the receivables deferral period (for example by improving receivables management) or by increasing the payables deferral period (for example by settling invoices as late as possible). In this manner an understanding of the cash operating cycle can assist in taking steps to improve working capital management and profitability.


Related Discussions:- Consequence of the cash operating cycle

International mortgage backed securities, International mortgage-back...

International mortgage-backed securities are the mortgage-backed securities that are issued in a country by a non-domestic entity. With limited size of the Indian

What is acquisition, Acquisition (takeover) or merger A merger is the s...

Acquisition (takeover) or merger A merger is the synergy or combination of two companies which are roughly equal in size by consensus of two organisations. A takeover is where

Help with 4 questions, I need assistance with 4 questions. How do I know s...

I need assistance with 4 questions. How do I know someone can help me and have some idea of what it would cost before submitting the information? Also, how fast is the turnaround

Treasury auction process, All treasury securities are issued on the b...

All treasury securities are issued on the basis of auction. The auction process is computerized and hence qualified broker-dealers can access it electronically. T

Functional classification of mutual funds, Functional Classification of Mut...

Functional Classification of Mutual Funds Functional classification of Mutual Funds is based on the basic characteristics of the mutual fund schemes for subscription. Mutual Fu

Assignment, I should write assignment on financial management ,but have no ...

I should write assignment on financial management ,but have no idea how to start and how to develop. Please help me

What interest rate is required to yield a balance, You invest $1,000 at an ...

You invest $1,000 at an annual interest rate of 5% compounded continuously. How much is your balance after 8.5 years?  How long will it take you to accrue a balance of $4,000? What

Please identify the largest potential threat, Using Southwest Airlines as a...

Using Southwest Airlines as an example, please identify the largest potential threat, the strategy employed, and what types of capital budgeting projects would be used to operation

Explain about shareholders equity, Does the shareholders' equity represent ...

Does the shareholders' equity represent the savings a company has accumulated through the years? No. The number which shows in the Shareholder's Equity of a company that was fo

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd