Operating Cycle
Capital refers to the money or wealth of the firm, which is required to start the business. Capital includes both external as well as internal sources of finance. Depending upon the duration of requirement of fund, capital can be categorised as fixed capital and working capital.
In order to purchase plant and machinery, land and building, furniture, etc. funds are required for a long period of time. These funds are called fixed capital. They are the long term sources of finance for the company.
On the other hand, funds are also required to meet day to day expenses of concern like puchase of raw materials, payment of wages, repair charges, etc. These funds are called working capital. They are the medium term and short term sources of finance of a concern. Operating cycle or working capital cycle determines the requirement of working capital of a firm. Other factors are nature of business, volume of sales, fluctuation in business cycle, production cycle, size of the business, etc.
Working Capital is used to meet daily expenses of the firm which includes raw materials, labour charges and other overhead expenses. Liquid cash can be used to meet the expenses of labours and overheads. Some part of raw materials can also be purchased by cash. The rest of the raw materials can be achieved on credit. The working capital gets converted and they are no longer available for further use. This implies that the working capital are utilised for some productive purposes for a certain period of time.
Raw materials purchased by the concern with the working capital is send for work-in-progress. It is further converted to finished goods. These final product or finished goods are taken to the market and sold to debtors to realise cash. This cycle is called cash cycle.That is, the purchase of raw materials with working capital till the realisation of liquid cash from debtors is cash cycle. However, cash cycle is different from operating cycle. The total time period taken to convert working capital back to its original form from raw materials is called operating cycle or working capital cycle. That is, the total time interval within which cash is converted back to cash is operating cycle.
Cash cycle gets over once the cash is realised from the debtors for finished goods. Cash may be realised before the production process gets completed. On the other hand, operating cycle continue untill the goods are sold and working capital is restored back to the business.
Operating cycle never ends. It continues as long as the business survives. The restored working capital is further utilised to purchase raw materials and thus the process continuous.
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