Operating and Cash Cycle Risk

Operating and cash cycle risks are types of business risks that companies face in managing their working capital.

Operating cycle risk refers to the risk that a company’s operating cycle, which is the time it takes to convert inventory into cash, may become longer than expected. This can occur if there are delays in the production or delivery of goods, or if there are changes in customer demand or payment terms. If the operating cycle becomes too long, it can strain a company’s working capital, leading to cash flow problems and potentially affecting its ability to meet its financial obligations.

Cash cycle risk, on the other hand, refers to the risk that a company’s cash cycle, which is the time it takes to convert cash back into cash, may become longer than expected. This can occur if there are delays in the collection of accounts receivable or if there are changes in payment terms with suppliers. If the cash cycle becomes too long, a company may not have sufficient cash on hand to meet its obligations, which can lead to liquidity problems.

Managing operating and cash cycle risks requires effective working capital management. This may involve implementing strategies to shorten the operating cycle, such as improving production and delivery processes or managing inventory levels more effectively. Similarly, managing cash cycle risk may involve improving the collection of accounts receivable or negotiating better payment terms with suppliers. By managing these risks effectively, companies can improve their cash flow and strengthen their financial position.