Question

How are the operating and cash cycles of the firm different? Why are they important?

Answer 1

Operating cash cycle is the time period between purchase of inventories and conversion to Sales. Operating Cash cycle =Average Inventory days+Days of Account Receivable.
Cash cycle of firm means cash to cash cycle or days when raw materials or inputs are converted to cash
Cash Conversion Cycle =Average Inventory days+Days of Account Receivable -Days of Account Payable

They are important because they help to identify the liquidity position of firm . Lower the operating and cash cycle higher is the cash in the firm. Operating cycle helps to identify the operational efficiency of firm and cash cycle helps to identify the efficiency in cash flow or firm or how well the company is managing cash. these can be compared with industry standard to identify whether the company is performing better or not