if a company’s operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable. t or f

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08-12-2022
Business

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if a company’s operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable. t or f

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Tundexi Tundexi · Answer 1 · 2022-12-12T18:15:35+01:00

It is a false statement that when a company’s operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable.

What is an operating cycle?

An operating cycle means the time it takes a company to buy goods, sell them and receive cash from the sale of said goods. In other words, it tells how long it takes a company to turn its inventories into cash.

The length of this operating cycle is dependent upon the industry. Understanding a company's operating cycle will help determine its financial health by giving it an idea of whether or not it'll be able to pay off any liabilities.

For example, when the business has a short operating cycle, this means it'll be receiving payment at a steady rate. The faster the company does generates cash, the more it will be able to pay off any outstanding debts or expand its business accordingly.