Aa Aa E 3. The components of the operating cycle Proper working capital management is essential for the long-term viability of a firm because: a firm's cash inflows, including the collections from its credit sales, tend to occur its cash outflows, such as the payments for its productive resources; and the value of a firm's sales and costs are less which means that they cannot be forecasted with compete accuracy and that a firm should maintain a backup quantity and source of liquidity The flows of cash and goods into and out of a firm can be depicted visually using several models, including a timeline and a cycle or circular flow. The operating cycle focusses on both (1) the movement of its raw materials and its finished and saleable products, and (2) the associated financial transactions and cash flows, and can be expressed using two equations Equation 1: Operating Cycle Inventory Conversion Period Receivables Collection Period Equation 2: Operating Cycle Payables Deferral Period Cash Conversion Cycle Knowledge of the timing of these activities and flows is critical because it helps you maintain the firm's liquidity and solvency. It gives you the information so that you can plan for potential cash shortages and work to raise the necessary additional capital the deficiency occurs According to Equation 1, the operating cycle focusses on the flow of raw materials and finished goods through the business and the sale of these goods to the company's customers, and the amount of time associated with these activities. Based on this perspective of the operating cycle, the operating cycle cab be broken down into the following two parts-depending upon how the business's firm's funds are invested: the amount of time needed for the business to obtain its raw materials, transform them into finished goods and sell them on credit to the firm's customers, which is called the period and the time period during which the finished product is sold to a credit customer and the corresponding account receivable is created and the customer's cash is ultimately collected, which is called the period The other perspective on the operating cycle, described in Equation 2, focusses on the financial transactions that