Final answer:
The average length between the purchase of raw materials and labour and the receipt of cash from debtors is called the Operating cycle, a key metric for assessing a company's efficiency in working capital management.
Step-by-step explanation:
The average length of time between the purchase of raw material and labour and the receipt of cash from debtors is called the Operating cycle. This is a crucial component in understanding a company's efficiency in managing its working capital. The operating cycle calculates the time taken by a company to purchase inventory, sell it to customers, and collect the cash from these sales. The shorter the operating cycle, the more efficient the company is considered to be as it can quickly turn its investments in inventory back into cash.
Another term related to the operating cycle is the Cash conversion cycle, which takes into account the time company's creditors allow until payment must be made for the raw materials and labour. It's essentially the operating cycle minus the creditors' payment period. This metric is very useful in assessing how well a company is managing its cash flows.
The Creditors' payment period, on the other hand, is the time it takes for a business to pay back its creditors after receiving goods or services. It doesn't factor into the operating cycle directly but is crucial for calculating the cash conversion cycle. High efficiency in managing the creditors' payment period can support better cash flow management within the business.