The operating cycle refers to the average time a business takes to re-generate the cash invested in the day to day transaction. This cycle determines the ability of the business to pay off its debts and other current liabilities on time. The business must keep track of its operating cycle in order to determine its working capital needs. One can achieve following benefits by keeping track of the operating cycle –
- Reduction of working capital requirement
- Proper management of margin requirement
- It can assist to negotiate better terms of payment with the vendor
- It enables comparison with benchmark operating cycle to gauge its financial performance
A business that insists on having a proper accounting system will always have a competitive edge as it will be equipped with all relevant financial information to accurately determine the operating cycle.