Question

The longer a company’s operating cycle, the greater the need for financing’. Critically comment on this statement with examples from practical life.

Answer 1

Operating cycle is the average time period for a firm to produce goods or services, sell goods and collect cash from the customers. Operating cycle is useflu in estimating the amount of working capital loan a company should take to carry out its day to day operations. Suppose the operating cycle for a company is 60 days and its days of working capital is only 30 days, this means the company needs to finance cash for its additional 30 days of operations.

ie: Longer the companys operating cycle, more the amount that should be financed for short term loans(Working capital demand loan).

Retail companies often have large operating cycles because they need to purchase the inventories first in the hope of selling them whereas Tech and IT companies have short operating cycle( even negative cycle) as they dont need to carry any huge inventory and their business model asks the client to pay first.