The financial cycle of a company is a fundamental concept to understand the economic management of a business. It refers to the period of time in which a company carries out its financial operations, from the acquisition of raw materials to the generation of income from the sale of products or services. In this article, we will explore in detail what the financial cycle of a company is, the different periods that make it up and the key calculations for its analysis.
What is the financial cycle of a company?
The financial cycle of a company is made up of a series of stages that reflect the flow of cash throughout business operations. It begins with the acquisition of raw materials, goes through the production of goods or services, their sale and ends with obtaining income. This cycle is crucial for the sustainability and profitability of the company, since any imbalance in the different stages can affect its liquidity and solvency.
The financial cycle is closely related to the operating cycle of the company, which It ranges from the acquisition of inputs to the delivery of products or services to the client. Both cycles are interconnected and their efficient management is essential for business success.
Periods of the financial cycle
The financial cycle of a company is divided into several key periods that reflect the times of duration of each stage. These periods vary depending on the industry, company size and other factors, but in general the following can be identified:
1. Inventory storage period
In this initial stage of the financial cycle, the company acquires raw materials or finished products that will be used in the production or sales process. The time that inventory remains stored before being used directly affects the company's cash flow, since it represents an investment that does not generate immediate income.
2. Production period
Once the company has the necessary inventory, the production or service provision process begins. This period covers from the transformation of raw materials to obtaining finished products ready for sale. The duration of this period depends on the complexity of the production process and the efficiency of the company in the manufacture of goods or the provision of services.
3. Accounts receivable period
After production, the company proceeds to sell its products or services to customers. In this period, accounts receivable are generated, that is, customer debts that must be paid in the future. Efficient management of accounts receivable is crucial to maintaining positive cash flow and avoiding liquidity problems.
4. Collection Period
In this final stage of the financial cycle, the company receives payments from its customers and converts accounts receivable into cash. The speed with which collections are made directly impacts the company's liquidity, since a long waiting period can generate cash problems and make it difficult to meet financial obligations.
Key calculations in the cycle financial
To effectively manage the financial cycle of a company, it is necessary to carry out a series of calculations that allow its efficiency and profitability to be measured. Below are some of the key calculations used in financial cycle analysis:
1. Average inventory storage period
This indicator measures the time that the company's inventory remains stored before being sold. It is calculated by dividing the cost of goods sold by the average inventory during a given period. A high storage period may indicate inefficient inventory management and high storage costs.
2. Accounts Receivable Collection Period
This calculation determines the average time it takes for the company to collect outstanding accounts from its customers. It is obtained by dividing accounts receivable by average daily sales. A prolonged collection period can affect the company's liquidity and require strategies to streamline the collection process.
3. Accounts payable payment period
This indicator reflects the time it takes the company to pay its suppliers for the goods or services purchased. It is calculated by dividing accounts payable by average daily purchases. A long payment period can create relationship problems with suppliers and affect the company's negotiating ability.
4. Cash Cycle
The cash cycle represents the time it takes for the company to convert cash disbursements into collections of accounts receivable. It is calculated by adding the average inventory storage period, the accounts receivable collection period, and subtracting the accounts payable payment period. A short cash cycle indicates efficient cash flow management.
5. Inventory turnover
Inventory turnover measures the frequency with which the company renews its inventory in a given period. It is calculated by dividing the cost of goods sold by the average inventory. High inventory turnover indicates efficient inventory management and rapid return on investment.
6. Average collection period
This indicator establishes the average time necessary to receive payments from clients. It is measured by dividing accounts receivable by average daily revenue. A short collection period is indicative of efficient financial management and a good relationship with customers.
In conclusion, the financial cycle of a company is a fundamental aspect of its economic management that directly affects its profitability. and liquidity. Understanding the periods that comprise it and performing the relevant calculations for their analysis will allow the company to make informed decisions to optimize its cash flow and maximize its financial performance.