What Does that Mean for a Business owner?
The operating cycle measures how well you manage your cash.
The operations of a merchandising business involve the purchase of merchandise for sale (purchasing), the sale of the products to customers (sales), and the receipt of cash from customers (collection). This overall process is referred to as the operating cycle. Thus, the operating cycle begins with spending cash, and it ends with receiving cash from customers. The ability of leaders to understand and manage the company's operating cycle is one of the most important predictors of long-term business viability. To understand this process begins with establishing business policies and procedures.
Businesses with longer operating cycles normally have higher profit margins on their products than businesses with shorter operating cycles. For example, it is not unusual for jewelry stores to price their jewelry at 30%-50% above cost. In contract, grocery stores operate on very small profit margins, often below 5%. Grocery stores make up the difference by selling products more quickly.
If what you are doing is not moving you towards your goals, then it’s moving you away from your goals. – Brian Tracy
My mission is to offer the best accounting and operations solutions and tips for entrepreneurs and small to mid-size companies worldwide seeking to close their process gaps with actual solutions.