Business Finance - Operating Cycle

Cash Conversion Cycle

A financial metric that expresses how many days it takes a company to convert cash into inventory, and then back into cash via the sales process.

Cash Conversion Cycle

The shorter the cash conversion cycle, the less time cash is in accounts receivable or inventory.

Operating Cycle

Financial metric that measures the time it takes for a company to convert its investments in inventory and accounts receivable into cash.

Operating Cycle

Essentially, it is the duration between the acquisition of inventory and the collection of cash from customers after selling the inventory.

Working Capital

It is the company’s investment in current assets such as cash, accounts receivable, and inventories.

Working Capital Management

It is the administration and control of the company’s working capital.

Permanent Working Capital

It is the minimum level of current assets required by a firm to carry-on its business operations given its production capacity or relevant sales range.

Temporary Working Capital

It is the excess of working capital over the permanent working capital given its production capacity or relevant sales range.

Maturity-matching Working Capital Financing Policy

The permanent working capital requirements should be financed by long-term sources while temporary working capital requirements should be financed by short-term sources of financing.

Aggressive Working Capital Financing Policy

Some of the permanent working capital requirements are financed by short- term sources of financing

Conservative Working Capital Financing Policy

Even some of the temporary working capital requirements are financed by long-term sources of financing. This policy minimizes liquidity risk but it also reduces the company’s profitability because long-term sources of financing entail higher cost.