Average time period between buying inventory
and receiving cash proceeds from its eventual sale. It is determined by adding
the number of days inventory is held and the collection period for accounts
receivable.
Collection Period : Number of days it takes
to collect accounts receivable.
A short operating cycle is one in which the
time between purchasing inventory and recovering the investment is brief. The
company recovers its investment and/or realizes profits quickly.
With a long operating cycle, cash may be tied
up in inventory and/or receivables for an extended period of time before the business is able to
recover its initial investment. Investments with a long operating cycle can be
sound, as long as the organization has sufficient access to capital to meet its
short-term obligations.
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