What is an Operating Cycle?

What is an operating cycle and how does a company differentiate a short operating cycle with a long operating cycle?
asked Dec 17, 2012 in General Business by answernest

1 Answer

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The phrase operating cycle refers to the period of time that a company’s cash is tied up in inventory and/or receivables before recovering the initial investment or realizing a profit or ROI .
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A short operating cycle is one in which the time between purchasing inventory and recovering the investment is brief. The company recovers its investment and/or realizes profits quickly.

With a long operating cycle, cash may be tied up in inventory and/or receivables for an extended period of time before the business is able to recover its initial investment. Investments with a long operating cycle can be sound, as long as the organization has sufficient access to capital to meet its short-term obligations.

An operating cycle should not be confused with a Fiscal Year .  The amount of time an operating cycle entails has nothing to do with a standard fiscal period.
answered Dec 17, 2012 by answernest