Question

If Abrams Company has an inventory turnover of 7.3 and a receivables turnover of 9.6, approximately how long is its operating cycle?

Answer 1

Answer:

It is 16.9

Explanation:

Operating cycle = Inventory turnover + Receivable turn over - payable turnover

Hence, Operating cycle = 7.3+9.6

=16.9

Operating cycle implies how long it takes us to convert entire production process to cash .

It has an direct relationship with the level of working capital required. The higher the operating cycle, the higher the working capital investment required to keep the operation running.

A cash driven businesses like restaurant which hardly sell on credit will certainly have shorter operating cycle compared to a manufacturing company.