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134 Corporate Finance BRILLIANT’S

raw materials and ending with the realisation nyU© hmoVr h¡Ÿ& XmoZm| _m_bm| _| IarXr go boH$a dmñV{dH$
from sale of finished goods. In both cases, there {~H«$s Ho$ ~rM EH$ A§Va hmoVm h¡Ÿ& g_` H$m `h A§Vamb hr
is a time gap between procurement of goods and "Am°naoqQ>J gm`H$b' H$hbmVm h¡Ÿ&
sales realization. This time gap is called
'Operating Cycle'.
Thus, the firm is required to make Bg àH$ma, g§ñWm H$mo ì`mnma J{V{d{Y`m| H$mo gwMmê$
investments in all these current assets (Credit ê$n go g§Mm{bV H$aZo Ho$ {bE BZ g^r H$a§Q> AgoQ²>g
facilities to customers, finished goods must be (J«mhH$m| H$mo H«o${S>Q> gw{dYm, Am°S>²©g© H$m Ü`mZ aIZo Ho$ {bE
kept in stock to take care of the orders, {\${ZíS> JwS²>g H$mo ñQ>m°H$ _| aIZm Amdí`H$ h¡, Ý`yZV_
minimum cash balance, raw material stock is
H¡$e ~¡b|g, am° _Q>o[a`b ñQ>m°H$ A~m{YV CËnmXZ Ho$ {bE
maintained for uninterrupted production.) to
run the business activities smoothly. The aIm OmVm h¡) _| {Zdoe H$aZm Amdí`H$ h¡& \§$S> H$s
requirement of funds depends upon the Amdí`H$Vm g§ñWm H$s Am°naoqQ>J gm`H$b nr[a`S> na
operating cycle period of the firm. {Z^©a H$aVr h¡&

Operating Cycle Period Am°naoqQ>J gm`H$b nr[a`S>
Operating cycle period means the total Am°naoqQ>J gm`H$b nr[a`S> H$m AW© am° _Q>o[a`b H$s
number of days involved in different stages of nM}qgJ go boH$a H«o${S>Q> _| ~oMo JE _mb H$s am{e dgyb hmoZo
operation commencing from purchase of raw
materials and ending with collection of sale VH$ {d{^Þ MaUm| _| bJZo dmbo Hw$b {XZm| H$s g§»`m h¡
proceeds from debtors after adjusting the {Og_| go gßbm`a Ûmam H«o${S>Q> MwH$mZo Ho$ {bE Xr JB© Ad{Y
number of days credit allowed by suppliers. H$mo ES>OñQ> H$a {X`m OmVm h¡Ÿ& Bg àH$ma, Am°naoqQ>J
Thus, the operating cycle is the total period gm`H$b, Am°naoeÝg Ho$ {d{^Þ MaUm| _| bJZo dmbm Hw$b
involved in different stages of operations,
which may be calculated by using the g_` h¡ {Ogo {ZåZ gyÌ go kmV {H$`m Om gH$Vm h¡…
following formula:

OCP = M + W + F + D – C
Where,
OCP = Operating Cycle Period M = Material Storage Period
W = Work-in-Process Conversion Period F = Finished Goods Storage Period
D = Debtors Collection Period C = Creditors Payment Period
Average Stock of Raw Material*
1. Material Storage Period (M) = #
Daily Average Consumption
Where,
Opening Stock Closing Stock
of RM + of RM
* Average Stock of Raw Material =
2

Material Consumed during the year
# Daily Average Consumption =
365 or 360