Financial Management: Principles and Applications, 13/e

18.3 Operating and Cash Conversion Cycles

The firm’s operating cycle and cash conversion cycle are two popular measures used to determine how effectively a firm has managed its working capital. The shorter these two cycles are (usually measured in days), the more efficient the firm’s working-capital management is.

Measuring Working-Capital Efficiency

The operating cycle measures the time period that elapses from the date that an inventory item is purchased until the firm collects the cash from its sale (if the firm sells on credit, this date is when the account receivable is collected). As can be seen in Figure 18.3, the operating cycle is the sum of the average number of days that an item is held in inventory before being sold, called the