The operating cycle measures the number of days it takes for money you have in cash to work its way through the business and return to cash. Calculating the operating cycle helps you understand why businesses that are growing quickly often have cash flow problems. A negative operating cycle means you need to pay your bills before you get paid by your customers. As your sales volume increases, you will need more cash to keep up with your bills. Unless you are able to invest more cash, you limit your business s ability to grow.
Most businesses have a negative operating cycle.
A positive operating cycle means that your customers pay you before you have to pay your suppliers. The more positive your operating cycle, the less cash you need to operate your business as sales increase. On the next page are a number of ways to make your business have a more positive operating cycle and to increase your cash flow. Do not overorder inventory. Make sure you buy what sells.