Final answer:
The net operating cycle measures the time between purchasing inventory and collecting cash from sales, indicating a company's efficiency in managing its operational capital with regards to inventory and receivables.
Step-by-step explanation:
The net operating cycle, also referred to as the cash conversion cycle, is a measure in business that shows the length of time between the purchase of inventory and the collection of cash from accounts receivables. This cycle indicates the efficiency with which a company manages its operational capital in terms of inventory and receivables. A shorter net operating cycle means that a company can convert its investments into cash quickly, which is a sign of efficiency.
The cycle consists of two main components: the period of time it takes to sell the inventory (days inventory outstanding) and the time it takes to collect the receivables (days sales outstanding). When these durations are shorter, the net operating cycle is reduced, signifying a more efficient management of the company's cash flows.
An Operating Cycle (OC) refers to the days required for a business to receive inventory, sell the inventory, and collect cash from the sale of the inventory. This cycle plays a major role in determining the efficiency of a business.