Cash Operating Cycle

The cash operating cycle relates to the time taken to convert your product / service into cash, it specifically measures the time taken from the cash outflow on materials, wages etc. to the cash coming in when the customer pays.
Lets look at an example of how it's calculated and more importantly how it can be shortened to improve cash flow for the business.
You purchase a part which is held in stock for 20 days, until it is moved into production, worked on for 3 days and then despatched to your customer. Your payment terms are 60 days from date of invoice and your suppliers payment terms are 30 days from date of invoice. The time taken from receiving the part to the payment coming in is 83 days (20 days in stock + 3 days in production + 60 days credit given to customer), however your supplier has given you 30 days credit so this must be deducted leaving you 53 days.
This means there are 53 days between you paying the supplier and the cash coming in from your customer, imagine this situation with every item you sell !!

What can be done to reduce your cash operating cycle and improve cash flow.
Let's make two changes and see the effect they have on cash flow, first the purchasing team don't buy the goods from the supplier till much nearer the point of usage, let us say the goods are now in stock for 3 days, secondly the customers period of credit is reduced to 30 days from 60, let us see how the changes impact on the length of the cash operating cycle.
The time taken from receiving the goods from the supplier to the cash coming in is now 36 days (3 days in stock + 3 days in production + 30 days credit to the customer) less 30 days credit from the supplier leaves 6 days an improvement of 47 days.