How can a company improve its Operating Cycle?

Improving a company's Operating Cycle involves decreasing the time taken to convert raw materials into cash flow from sales. One effective way to achieve this is by shortening the number of days inventory sits. When inventory sits for a shorter period, it reduces the time between purchasing raw materials and selling the finished goods, resulting in a more efficient cycle. This means that the company can sell products more quickly, reinvest the cash into operations, and improve its liquidity.

Shortening the days inventory sits leads to an increase in inventory turnover, meaning that the company sells through its inventory more frequently. This helps in minimizing holding costs and potential losses associated with excess inventory, thereby enhancing overall operating efficiency and profitability.

In contrast, reducing sales revenue would likely prolong the operating cycle as it would slow down cash flow. Increasing days payable outstanding could delay cash outflows but does not necessarily enhance efficiency because it represents a longer time before the company fulfills its payables, which does not directly improve the operating cycle. Lastly, while increasing inventory turnover is beneficial, it typically results as an effect of shortening days inventory sits rather than a direct method to improve the operating cycle on its own.