4. Understanding the operating cycle

The operating cycle corresponds to a company's current activity. It is made up of a series of successive operations. It begins with procurement, continues with the manufacture of products and ends with sales, requiring successive inventories. It provides the company with resources at the time of sales.

Long before it receives any cash from product sales, the company has to finance raw materials inventories, production costs (miscellaneous expenses), finished goods inventories and customer loans.

There is therefore a time lag between expenditure and income, referred to as working capital requirements (WCR). Working capital requirements are financed by overall net working capital (ENWC), which is equal to long-term resources (shareholders' equity and medium- and long-term debt) less fixed assets (= property, plant and equipment – machines,...