The Operating Cycle - Your Washing Machine Or Your Business?
OVERVIEW - Information on the operating cycle of a business . Canadian business owners and financial can understand their working capital and cash flow needs relative to business financing solutions
The 'operating cycle is a distinct part of any business. Frankly we believe that most business owners intuitively know it exists - they just didn't know it had a name.
The operating cycle is the repetitive pattern of a turnover of a businesses current assets and liabilities. Let's examine that in a bit more detail. In essence each business established within their company, and probably within their industry, a repetitive pattern of turnover.
In the first phase of the operating cycle a business, unless it is a service business, buys inventory and materials which they will resell to customers. Normally these goods are obtained on credit. The company buys product, and obviously has an account payable to that supplier. So we find that company paying their supplier, cash goes down and inventory goes up. So far so good.
In phase two of the operating cycle the company sells product to a customer. More often than not it sells on credit - this generates accounts receivable - the good news is that the company can finally record sales, or revenue.
In phase three, the final phase of our operating cycle, the company collects the receivable and converts the entire process we have gone through back into cash.
Yes, our analysis is over simplified, and of course behind all these processes the company has administrative and sales costs that back up the entire operating cycle. All of these costs are in some manner related to the final sale and have some sort of contribution in that regard.
We also need to remember that through the entire process bank loans or working capital facilities regularly turn over.
Each company and industry has a different operating cycle - within each industry some companies are clearly doing better than others.
One of the best know ways to measure a firms operating cycle is a formula created by the DUPONT COMPANY many years ago - not surprisingly the formula is called the DUPONT FORMULA!
The formula looks at relationships, or ratios, in the balance sheet and income statement and provides solid ways of measuring the operating cycle and how it affects a company's profit, and operations. It provides a lot of insight into how a company can improve profitability by emphasizing asset turn over and showing how it's important as sales. Even a non- financial person should be able to understand this - we are simply saying that if a company get buy something, sell it, and collect the money fast and start all over that will increase profits over a company who takes twice as long to repeat that entire process. Sales are not always the be all and end all! A company, using DUPONT, can show that even if they make a little less on each sale, but turn over inventory and receivables faster, can do as well or better than the competitor.
In summary, a true understanding of the operating cycle allows a business owner or financial manager to focus on expenses, asset turn over, and margins, and see the inter - relationship of all these three components of a business. Understanding and improving your operating cycle will make your firm a leader, not a laggard, in your industry. Seek out and speak to a trusted, credible and experienced Canadian business Financing Advisor with a track record of success who can assist you with your business finance requirements.
Stan Prokop - founder of 7 Park Avenue Financial –
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - Completed in excess of 100 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing. Info & Contact Details :
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Office = 905 829 2653
' Canadian Business Financing with the intelligent use of experience '
ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.