Cash Cycle Week 5 D: Describe The Operating Cycle And The Cash Cycle. What Are The Differences?

Cash Cycle Week 5D
Describe the operating cycle and the cash cycle. What are the differences?
The operating cycle mainly represents the average time that it takes for a company to acquire inventory and collect cash from the sale of the same (Sekhar, 2009). The sale made might not necessarily be from the same inventory but of something that is associated with it. For example, a firm might acquire raw materials for making water bottles and after two months have its customer, a local water company, buy the finished product. In the scenario above, the operating cycle will be the two months that it took the plastic firm to sell the final product after initially receiving the production materials.
Conversely, the cash cycle represents the period between cash disbursement and the collection of cash from a sale (Greenwood, 2002). Unlike the operating cycle, the cash cycle could be longer, but it involves and applies the same explanation albeit slightly different. Using the same plastic company example from above, if the plastic company had paid for the raw materials a month early and managed to sell the water bottles after three months, then the cash cycle would be the three months. The cash cycle begins immediately after a business makes payment and not necessarily after receiving the inventory.
One major difference between the two cycles is that the operating cycle measures the period from receipt of inventory while the cash cycle measures the period from the time cash is disbursed. The other difference involves their usage. While the operating cycle is used in measuring the time it takes to manufacture and sell products, the cash cycle is used to measure the fluidity of a business’ cash flow. The third difference involves the period for both. The cash cycle takes longer than the operating cycle. However, it is important to note that both cycles have the same end and, therefore, overlap by necessity.
References
Greenwood, R. P. (2002). Handbook of financial planning and control. Aldershot, Hants, England [u.a.: Gower.
Sekhar, G. V. S. (2009.). Business policy and strategic management. S.l.: I K International Publi.
Explain the connection between a firm’s accounting-based profitability and its cash cycle.
The connection between a company’s cash cycle and its accounting-base profitability is that whenever the cash cycle is shortened, the company’s profitability increases (Anser and Malik, 2013; Muscettola, 2014). The cash cycle or the cash conversion cycle mainly involves converting as many products as possible into cash. Whenever cash is invested or is paid out for the sake of acquiring something for the business, it becomes part of the cash cycle. Once the raw materials or goods are acquired, the time it takes for them to be manufactured and sold matters. If it takes a long time to convert the finished products into cash, then a business is not making as much profit as it should. However, if on the other hand, a business is taking a short time to convert their finished pro...