Final answer:
The operating cycle of the company in the question is 75 days, which includes 30 days to sell the inventory and 45 days to receive cash from the sale.
Step-by-step explanation:
The operating cycle of a company is a crucial financial metric that represents the time it takes for a business to convert its investments in inventory back into cash through the sales process. In the provided scenario, the operating cycle is determined by two key components: the number of days it takes to sell the inventory and the number of days it takes to collect cash from those sales.
In this case, the company sells an item 30 days after acquiring it, and then proceeds to collect cash from the sale after an additional 45 days. The calculation of the operating cycle involves adding these two components together:
Operating Cycle = Days to Sell Inventory + Days to Collect Receivables
Substituting the given values into the formula:
Operating Cycle = 30days+ 45days
This results in an operating cycle of 75 days for the company in this scenario.
Understanding and managing the operating cycle is vital for businesses as it directly impacts liquidity and cash flow. A shorter operating cycle implies that a company can quickly convert its investments into cash, enhancing its financial efficiency. Conversely, a longer operating cycle may indicate potential liquidity challenges and a delay in converting sales into actual cash receipts. Therefore, monitoring and optimizing the operating cycle is essential for businesses to maintain healthy cash flow and overall financial stability.