The financial cycle as an indicator of enterprise performance
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Video: Macro: Unit 1.1 -- The Business Cycle 2024, July
The financial cycle allows you to measure the efficiency of the enterprise, which is determined by the final profit. Profit, in turn, is generated by the money held by the firm. This is especially true of enterprises engaged in trading activities. The more funds are in circulation, the more profit can be generated.
Working capital is very limited in volume. To achieve maximum efficiency, you need to carefully consider the strategy for their use. Otherwise, you can even leave minus. Efficiency is determined by the amount of profit generated or the ratio of income to expenses. As a rule, data for 1 year are taken for measurement. The turnover of goods (profitability and number of sales) greatly influences this process.
To correctly understand the thought, it is necessary to give an example. Let's say there are two deals. For one, the sales amount is 100 thousand dollars, profitability is 50%, and the duration of the turnover is two months. Another has the same amount of sales, profitability 25%, duration - one month. The effectiveness of using these two deals will be the same.
Financial cycle concept
The financial cycle is the period during which the funds included in the turnover of the company are fully involved and cannot be used arbitrarily. Simply put, the financial cycle is the period of time that elapses between the payment of an advance (payables) to the supplier of resources and the receipt of funds from buyers for the shipped products.
Let's say you sell digital TVs. The financial cycle will be called the period from the purchase of the necessary materials for the production of equipment until the trading floors pay you money for the products sold (or simply do not purchase it, it depends on the form of cooperation).
The sales team uses this concept to determine the effectiveness of a transaction. The financial cycle is a good tool for communicating with customers, analyzing discounts and margins, as well as drawing up a strategic plan for the company.
