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once the business has purchased inventory, those funds are not available for other uses. The business views this as an acceptable tradeoff because the inventory is an investment that will hopefully generate returns, but keeping the operating cycle short is still a goal for most businesses so they can keep their liquidity high.
Keeping inventory during a long operating cycle does not just tie up funds. Inventory must be stored and this can become costly, especially with items that require special handling, such as humidity controls or security. Furthermore, inventory can depreciate if it is kept in a store too long. In the case of perishable goods, it can even be rendered unsalable. Inventory must also be insured and managed by staff members who need to be paid, and this adds to overalloperating expenses.
There are cases where a long operating cycle in unavoidable. Wineries and distilleries, for example, keep inventory on hand for years before it is sold, because of the nature of the business. In these industries, the return on investment happens in the long term, rather than the short term. Such companies are usually structured in a way that allows them to borrow against existing inventory or land if funds are needed to finance short-term operations.
Operating cycles can fluctuate. During periods of economic stagnation, inventory tends to sit around longer, while periods of growth may be marked by more rapid turnover. Certain products can be consistent sellers that move in and out of inventory quickly. Others, like big ticket items, may be purchased less frequently. All of these issues must be accounted for when making decisions about ordering and pricing items for inventory.
Q.4 What is the implication of operating leverage for a firm.
Ans.
Operating leverage: Operating leverage is the extent to which a firm uses fixed costs in producing its goods or offering its services. Fixed costs includeadvertising expenses, administrative costs, equipment and technology, depreciation, and taxes, but not interest on debt, which is part of financial leverage. By using fixed production costs, a company can increase its profits. If a company has a large percentage of fixed
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What is operating cycle in accounting management?
Operating cycle is the time which required by the business from acquiring inventory to production and selling of products and generating revenue.
What is a cash operating cycle?
A Cash operating Cycle is the average time taken to acquire goods and services and convert them to cash in producing revenues
What is the operating cycle of a merchandising business?
ambot
The main difference between operating cycle and cash conversion cycle?
The cash cycle starts when you pay your supplier and ends when your buyer pays you. The operating cycle starts with acquiring of inventory or raw material ands ends with receipt of payments of your good.
How can a company improve its operating cycle?
To improve the operating cycle of a company that is required availability of human resources that is really qualified of the company. It requires a team work that can work together.
Why is the normal operating cycle for a merchandising company likely to be longer than for a service company?
Why is the normal operating cycle for a merchandising company likely to be longer than for a service company?
Cash operating cycle?
The cash conversion cycle (Operating Cycle) is the length of time between a firm's purchase of inventory and the receipt of cash from accounts receivable. It is the time required for a business to turn purchases into cash receipts from custome.
The basis for classifying assets as current or non-current is conversion to cash within?
operating cycle or one year, whichever's longer
Cost of inventory should be classified as?
expense
Which businesses are likely to have the shortest operating cycle?
i think food store
What is the operating cycle for Working Capital?
maa ki chut for this site..
What are the different between an operating cycle and a cash conversion cycle?
Operating cycle is the period in which company purchase raw material and good manufactured from that raw material while cash cycle is investing cash in inventory to manufacture the goods and selling the goods and earning cash from that sales and after that collecting cash from debtors.
