What is a cash cycle?

Sometimes it is called a cycle of cash conversion, the monetary cycle is related to the amount of time that passes between the purchase of raw materials for the creation of goods and services and the payment of payment for these products. The concept can also be used on a transaction process related to shares and similar securities. The key factor of the idea of ​​calculating this cycle is to understand the period when working capital is not available for use in other purchases.

In terms of production process, the monetary cycle begins by obtaining the materials needed to produce the finished goods. The cycle continues at the time necessary to use materials to create products, wrap them and delivery to customers. Once the client is invoiced for the supplied goods, the last step begins. The cycle is considered complete when the department of receivables receives and enters the payment in full on the invoice covering the supplied goods.

The duration of the cash cycle budE differ depending on several factors. First, the amount of time that is needed to create a product is an important aspect of calculation, because goods that can be produced quickly helps to significantly reduce the cycle. Furthermore, the amount of time spent by checking, packing and transporting the finished product will increase the total length of the money cycle. The amount of time that the client requires to make the payment for the finished goods to the cycle length.

A short cash cycle is an ideal situation because it allows companies to use working capital earlier than later. There are often ways to shorten a longer cycle and achieve a more efficient process. For example, the refining of production and transport procedures can shave hours or even days. In addition, the offer of motives for a customer who quickly pays for the goods will also significantly shorten the overall cycle.