ITFT Operating cycle

ITFT Operating cycle

• 1.
  OPERATING CYCLE
• 2.
  • A continuousprocess starting from payment of cash for purchasing raw material ,production , stocking , selling until obtaining money from debtors. • It is a cycle involving—- conversion of cash into raw material > conversion of raw material into WIP > conversion of WIP into Finished goods> conversion of Finished goods into cash /debtors and > conversion of debtors into cash. • Duration of Operating Cycle = Raw mat. period+WIP period +Finished goods period +Debtors collection period –Creditors payment period
• 3.
  Maximization of shareholder’s wealth of a firm is possible only when there are sufficient return from the operations • Successful sales activity is necessary for earning profit sales do not convert into cash immediately • There is invisible time lap between the sale of good and receipt of cash • The time taken to convert raw material into cash is known as operating cycle • Conversion of cash into raw material • Conversion of raw material into work in progress • Conversion of Work in progress into finished goods • Conversion of finished good into Sales ( Debtors and cash )
• 4.
  Operating Cycle in Manufacturingfirm Cash Raw Materials W I P Finished Goods Debtors SALES
• 5.
  • The speed/time duration required to complete one cycle determines the requirements of working capital, longer the period of cycle larger is the requirement of working capital.
• 6.
  Operating cycle ofNon Manufacturing Firm cash Receivables Stock of finished goods