Final answer:
The operating cycle is a series of activities that a company undertakes to generate sales and profits, which are essential for business growth and sustainability. Companies can reinvest their profits into various endeavors to ensure ongoing success and may also rely on borrowing or equity to finance their growth.
Step-by-step explanation:
The operating cycle refers to a series of activities that a company undertakes to generate sales and profits. A business can grow through reinvesting a portion of its profits, thereby improving or adding to its facilities, hiring more workers, or purchasing advanced technology. This reinvestment process, fueled by cash flow, which is a real measure of a business's profits, supports the production of additional goods, leading to further sales and a larger cash flow in subsequent selling periods.For many companies, especially established ones, reinvesting profits serves as a primary source of financial capital. Profitable firms can spend on equipment, structures, and research and development. There are four main ways that firms can raise the financial capital necessary for such investments from early-stage investors; by reinvesting profits; by borrowing through banks or issuing bonds; and by selling stock.In conclusion, a company's ability to continuously invest in its growth, even during times of low profits or losses, is crucial to its survival and expansion. While profits are a significant source of financial capital, firms often resort to borrowing or raising equity to ensure they have sufficient funds to reinvest in their ongoing operations.