CA Inter | Operating Cycle & Working Capital: Why Shorter Cycles Drive Higher Business Efficiency

"I first taught you the word 'cycle' during our lessons on cash management . I discussed this cycle in the chapter covering the operating cycle, treasury management, and cash management, where I might have referred to it as the operating cycle, cash cycle, or working capital cycle. How do we determine this cycle? It is calculated by adding the debtors' credit period (how many days of credit you give), the raw material holding period (how many days the material stays in the warehouse), the Work-In-Progress (WIP) holding period (how many days it remains in the machine), and the finished goods holding period (how many days the finished goods sit in the sales outlet), and then subtracting the creditors' holding period. As you remember, we have done this before, and this is what we call the cycle. The larger the cycle, the more money you will need to invest in a large business. Conversely, having a shorter cycle allows you to do more business with less money. For example, if a person gives a debtor credit for one year, they will only be able to roll that money over once in that year; if 100 crores are given as credit, that 100 crores is tied up and will only return after a year. However, if the debtors pay them back in 10 days or a month, they can use that same money to do 12 times the amount of business. With just that 100 crores, they can generate 1,200 crores in business because the debtor's cycle is rolling 12 times. Therefore, for you to do more business with a smaller amount of invested money, it is essential for the cycle to be short. As I mentioned, if your business scale is large, you need more working capital, and if your cycle is large, you also need more working capital . So, if you want to operate a business with less working capital, you must either reduce your scale or shorten your cycle. Reducing the scale of the business would be foolish, as the goal is to grow the scale. What is the point of reducing your scale just to lower your working capital? Ultimately, having a large scale combined with a short cycle is the best possible scenario for your profitability. #OperatingCycle #WorkingCapital #BusinessFinance #CashCycle #FinancialManagement #CorporateFinance #InventoryManagement #Debtors #Creditors #BusinessEfficiency #FinanceConcepts #CommerceStudents #BusinessGrowth