Duration of the operating cycle. What is an operating cycle?

Many companies were in unpleasant situations associated with the sudden withdrawal of funds from the turnover. The exit from them is extremely complex and can be accompanied by great losses.

Relevance of the issue

Often, the director decides to withdraw funds from the account to finance a project, assuming that it is paying back and the ability to repay the obligations due to this to suppliers. Meanwhile, as practice shows, the scenario in such situations is standard. After a while it turns out that there is not enough money to pay for the supplied material and raw materials. Accordingly, we have to urgently seek additional sources, ask the debtors to pay their debts ahead of time, negotiate with banks and so on. Similar cases have occurred in large corporations, which have rashly changed the terms of payment with suppliers and provide customers with deferred payments. To do this, new contracts were concluded with the counterparties. Their essence was the refusal to use deferrals in exchange for reducing the purchase price of the goods. Along with this, buyers purchased products at increased sales costs. However, they were given at the same time twice as long as before, the postponement. A few months later, companies began to face an acute shortage of working capital. Accordingly, they had to urgently lend to banks. The company will not have problems with a lack of current assets, if management begins to strictly control the proportion between its own and borrowed capital, through which the financing of operating activities. To do this, it is necessary to develop an effective management model. It involves planning the duration of the operational and financial cycles. In addition, you will need to determine the current liquidity.

Operational cycle of the enterprise

It includes several processes. During it, in particular, the purchase of materials and raw materials, the creation of products, its sale, as well as the repayment of debt (if any) are carried out. Simply put, in the course of the operational cycle, a complete turnover of assets occurs.

Key Elements

Within the operational cycle, the following components are distinguished:

1. Total turnover of MPZ. It is also called the production cycle. It shows the average number of days that are needed to transfer raw materials and materials to the finished product. Accordingly, it starts from the moment of receipt of stocks to the warehouse and is completed when the finished products are shipped to the consumer.
2. Turnover of accounts receivable. It represents the average time period necessary to pay off obligations by buyers who purchased products on credit.
3. Turnover of accounts payable. It represents the period of time during which the company is calculated on its obligations to other organizations.

Operational and financial cycle

If there is a decrease in the dynamics, then this is considered a positive trend. The financial cycle is the gap between the date of payment for obligations to counterparties and the receipt of funds from debtors (buyers). During this period, own funds make a full turn. Reduction of the operational cycle may be due to the acceleration of other operations. For example, the duration of storage of MPZ, manufacturing of products, keeping it in a warehouse is reduced. The duration of the operational cycle can also change under the influence of the acceleration of the turnover of receivables.

Turnover MPZ

The effectiveness of management depends on the ratio of the duration of the financial and production cycle. The latter includes periods of turnover:

1. Raw materials.
2. Unfinished production.
3. Stock of finished products.

Production and operational cycle

The corresponding equations are used to determine them. To calculate the duration of the production cycle, the following equation is used:

- ПЦ = ПОгп + ПОнзп + ПОпз, where:

• POP - the number of days spent on the turnover of stocks of semi-finished products, materials, raw materials;
• PONZP - the number of days of turnover of work in progress;
• POGP - the duration of turnover of stocks of finished products (products) in days.

The calculation of the operational cycle is carried out using the parameter found above. In addition, in the calculation, a value is used that characterizes the average debt turnover of debtors. Their amount will show how much the operating cycle continues. The formula looks like this:

- OC = PODz + PC.

Interrelation of indicators

When analyzing the structure of current assets available to the company, the importance of time characteristics for ensuring efficient management of capital becomes evident. Particular importance in this case is the distribution of the firm's need for current assets in specific periods. The calculation is based on the methodology based on the duration of the financial and operational cycle and the estimated costs for the current activity. The first indicator includes the time for the delivery, fabrication and assembly of products, their sale, the expectation of repayment of buyers' debts. The financial cycle - the duration of circulation of cash - is the period during which the funds are not involved in the turnover. Its duration can be defined as follows. From the indicator characterizing the operational cycle, the time of circulation of debts to creditors is deducted. Working capital management is carried out to reduce the period in which funds are not involved. With a decrease in the duration of the financial cycle, accordingly, the time of use of its working capital becomes less.

Features of accounts receivable

The obligations of counterparties are an integral part of the work of any company. A large share of accounts receivable in the overall system of assets significantly reduces the liquidity and solvency of the firm, thereby increasing the risk of losses. The operational cycle of a modern company involves the dynamism of transactions. In today's conditions, much attention must be paid to the debt of debtors. Often it is defined as a component of working capital. This element represents specific requirements for organizations and citizens regarding the payment of services, products or work. There is also a trend in which accounts receivables are identified with commercial loans. As a rule, the economic benefit from such obligations is expressed in the fact that the company, performing an operating cycle, expects to receive money or equivalents. Accounts receivable can be recognized as an asset if there is a possibility of its repayment. If it is absent, the amount of obligations is subject to cancellation.

Sustainability Management

To create an effective model, you need information from the budget of expenses and revenues, some projected indicators of balance items. As a mandatory requirement is the monthly breakdown. The more often the budget execution process is controlled and, consequently, the solvency of the company, the better. The development of the model will also require the values of turnover, indicators of the duration of the operational and financial cycles. Of particular importance will be such quantities as:

1. The need for short-term loans attracted to replenish working capital.
2. The planned value of the liquidity ratio at the current moment.

The first indicator is defined as the difference between the total requirement for working capital and own funds. The calculation of the target value of KT can be carried out as follows:

- Ктл = POC x average expenditure of funds per day / short-term liabilities.

This model allows us to understand how OC and FC affect the coefficient index.

Conclusion

Each manager should clearly understand what the operational cycle and the period of turnover of funds are. Due to this, he can get all the necessary information to determine the need for own assets. In addition, you need to understand the essence of the business, understand how processes are built within the company, how optimistic they are, whether there are reserves for optimization. In the course of the calculations it is also necessary to take into account that the size of its current assets continuously changes throughout the year. In this regard, every month when comparing actual and planned indicators, you should constantly monitor the adjustment of the model parameters. In order to understand the significance and importance of the terms of the cycles it was not only the CFO, it is advisable to determine the responsibility of the heads of departments for each element. This can be done by linking the system of bonuses and bonuses operating in the organization with the required indicators.