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Cash management in business is a crucial part to keep the business running and there are many factors that play a role in maintaining a margin of optimum utilization of funds and avoiding cash crunch which can be managed by managing operating cycle with the help of Accounts receivables services efficiently.
The Operating cycle is nothing but the period between the purchase of inventory and collection of funds from the sale of such inventory. The period in-between needs to be calculated and managed in a manner that helps the business to pay their debts timely by receiving the payment from sale in an efficient manner. To manage the operating cycle, the company policy on accounts receivables plays a major role.
Accounts Receivable is the amount outstanding in
the book of accounts from the date the sale was recorded till the amount is
received against such sale. Optimization of operating cycle period shall
improvise the credit cycle of the company which in return will be helpful in
managing the cash flow.
Starting from the period of the invoice to be raised from the date of order received till the company receives full payment against the order, there is a formula a company has to apply to manage the whole process to manage the foreseeable expenses of the company.
In the current economic scenario, where the market fluctuations are high managing the fund flow is a task. In Global Trade the payment management needs to be the monitor as money exchange gets involved and in high volume trade, a change in exchange rate amounts to high profits or losses.
Account receivable service will be handling such accounting entries in a manner that will create a bad debt reserve in the company to overcome loss on any non-receipt of payment. Accounts receivable services start from the day the finished goods are ready till the payment is received and the account is settled by the department. Read more about what is accounts receivable services.
Operating cycle starts with the time the company invests borrowed money/goods to start the business operations until the company can achieve the receivables from the sale of goods/service. The operating cycle decides the working capital required by the company to achieve its optimum utilization.
Shorter the operating cycle, the requirement of working capital also reduces. A lot of businesses offer discounts or some perks for clearing the receivables before the payment is to encourage early payment and in the same manner charges some interest on receivables if the payment is made after a certain time to recover the opportunity cost and stabilize the bad debt accounting entry.
A lot of measures are taken in the company to manage the account receivables. There are certain limitations laid out by law in order to maintain a healthy level of bad debt reserve in the company to suffice any kind of unforeseen bad debt including bad debt arising out of account receivables.
Duration of Operating Cycle
The Managing Operating cycle is simple if the company is ready to put in the right resources at the required department of the company. The following are the ways which can be followed:
The Operating cycle is directly linked with the
Accounts payable and Accounts Receivable services. The business operations of
any company are inter-related one activity will always impact the other. For the
operating cycle, the decision made by the inventory management will impact the
account receivable services. Any business activity shall end with the account
receivable hence being the last step of the operations, it requires attention
at every stage of the company’s activity. The service will require an expert’s
knowledge and experience to manage the accounts receivables of the company.
The operating cycle of the company being the average period the company has to manage the cash flow between the period of work in progress and accounts receivables. Therefore every company should manage its operating cycle of accounting receivables to regulate the cash inflow in the business.