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John Moffat.
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Faizahmad1009
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Can you please correct me that Cash Operating Cycle is the time interval between the Cash Inflow & Cash Outflow.
1) Higher Cash Operating Cycle indicates that company is not doing good because they have Cash Inflow > Cash Outflow
(i.e. they will be OUT OF CASH for a longer time which creates liquidity problems for the business where the company will go to the short-term overdraft being taken to satisfy the cash demand)
2) How does the Cash Operating Cycle affect Profitability? It is true that an increase in Cash Operating Cycle will decrease Profitability? But HOW?
John Moffat
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What you have written for (1) is correct.
For (2) an increase in the operating cycle might decrease profitability for several reasons. If it is because they are taking longer to collect receivables, then there is more risk of some debts becoming irrecoverable. If it is because the are carrying too high levels of inventory, then there is more risk of some of the inventory becoming out-of-date and not sellable. If they are having liquidity problems and have an overdraft as a result, then they will be paying interest and this will reduce the profitability.
Faizahmad1009
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