MONITORING – OPERATING CYCLE

It is noted that the total working capital need depends upon the length of the operating cycle.  The lengthier the operating cycle, the greater would be the working capital need.  The operating cycle of a firm is consisting of different cycles for different elements of working capital.  Therefore, the financial manager must monitor the duration of all these individual operating cycles for different elements in order to effectively control the working capital.  The following points are worth nothing here:

a)    The actual operating cycle period should be ascertained for each element i.e., the raw materials, the work-in-progress, the finished goods, the receivables etc. over a period of time and should be compared with the standard operating cycle period set for the same firm or for the industry as a whole.  Efforts should also be made to point out the reasons for differences in the actual operating cycle period and the standard operating cycle period.

b)    There should always be an attempt to reduce the length of the operating cycle, total as well as for each element.  The standard operating cycle period need not be lowered but the actual operating cycle period must be kept as low as possible.  This makes the firm have comfortable liquidity.

c)    Efforts in particular, are needed to control the Receivables Conversion Period.  If the firm relaxes in collection, the customer will always like to take liberty.

For more help in Monitoring - operating cycle in working capital management please click the button below to submit your assignment: