OPERATING CYCYE OR WORKING CAPITAL CONCEPT
Working capital cycle or operating cycle is the whole process starting from the investment of cash for purchasing the inventory or raw material to generating the cash by selling the finished materials. Generally the whole process of operating cycle is of three phases:
1. Investment of cash for the purchasing of Inventory. Cash can be used in the purchase of raw material, transportation of raw material to the work floor, conversion of raw material to the finished goods and then transfer of finished goods to the store. If we take the example of trading organization, there is no such manufacturing activity involved. They used cash for purchase of finished goods, some transportation expenditure and then sell it to the consumers. In that case operative cycle is comparatively short.
2. Sometime it is very necessary for a firm to sell their product and service on credit. In that case, Cash are not received by the firm at the time of transaction and inventory is converted as receivables.
3. In final stage of operating cycle, Firm collects the cash against the receivables. Now firm again convert cash into inventory, Inventory into receivables and receivables into cash