Question

What is the link between operating cycle and working capital?

Answer 1

The link between the operating cycle and working capital-

A working capital requirement of a firm depends upon its operating cycle. Here, Operating Cycle is the total period considered starting from the purchase of the raw materials till the final payment has been collected from the debtors. Longer the operating cycle, larger will be the working capital requirement. For example an organisation that deals in services or trading will not require much of working capital. This is because such organisations involve small operating cycle and there is no processing done. Herein, the raw materials are the same as the outputs and the sales transaction takes place immediately. In contrast to this, a manufacturing firm involves large operating cycle and the raw materials need to be converted into finished goods before the final sale transaction takes place. Thereby, such firms require large working capital.