The Operating Cycle - My Washing Machine Or My Business Cash Flow ? !

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.

by: sprokop

POST COMMENT

Do You Want To Start Your Very Own Custom T-shirts Business? Read This! Raised Wattage Elite Extract Extractor From Breville - Business Business Owners Can Now Revolutionize The Way They Do Business With Top Notch Seo Services How Choosing The Wrong Telemarketing Company Can Hurt Your Business Network Promotion Concepts That Will Modify Your Business How Seo Can Convert Your Business To Victory Facebook Joomla Extension Increases Online Presence Of Your Business Web Design Melbourne: How Your Online Business Can Be Transformed Into A Thriving Cash Cow Web Design Company Realizes The Goals And Objectives Of Your Business Mobile Sites Are The Pre-requisites For A Successful Online Business Business Owners Can Conquer Their Industries With Top Notch Web Design And Seo Services Easier Than Various Forms Of Small Business Loans For Women Available To Entrepreneurs Understanding Business2business Directories Better