Comment on the following: Working capital of a firm depends upon the length of its operating cycle.

The length of operating cycle is a major determinant of working capital requirement of a firm. Operating cycle is the time that elapses between the cash outlay for procurement of raw material and the cash realisation by the sale of finished goods and realisation of sundry debtors. Operating cycle concept is important for management of cash and management of working capital because the longer the operating cycle the more financial resources the company needs. Therefore, the management has to remain cautious that the operating cycle should not become too long. Requirement of working capital over the operating cycle period could be used for short-term, medium term as well as long-term. The company can work out its working capital needs for different periods through cash budget which is key part of working capital planning. To prepare such a budget operating cycle parameters are of great use as estimation of future sales level, time and amount of funds flowing into business, future expenditure and costs all can be made with least difficulty to help the main target. Then, operating cycle help in assessing the needs of working capital accurately by determining the relationship between debtors and sales, creditors and sales and inventory and sales. Even requirement of extra working capital can be guessed from such estimate.