Clean operating cycle. Financial and production cycles of an enterprise and their relationship. Operating cycle: calculation formula

The effectiveness of financial management largely depends on the ratio of the duration of the financial and production cycles.

The production cycle begins from the moment materials are received at the enterprise's warehouse, and ends when products made from these materials are shipped to the buyer.

The financial cycle begins from the moment suppliers are paid for these materials (repayment of accounts payable), and ends when money is received from customers for shipped products (repayment of accounts receivable).

To estimate the duration of cycles, turnover indicators (turnover period in days) are used.

The production cycle consists of:

Turnover period for raw materials;

Work in progress turnover period;

Turnover period for finished goods inventories.

The financial cycle consists of:

Accounts payable turnover period;

Accounts receivable turnover period.

Ways to shorten the financial cycle are to reduce the receivables turnover period and increase the accounts payable turnover period.

Reducing the production cycle involves:

Reducing the inventory turnover period; reducing the turnover period of work in progress;

Reducing the turnover period of finished products.

Production cycle An organization is characterized by the period of full turnover of working capital used to service the production process, starting from the moment raw materials, materials and semi-finished products arrive at the enterprise and ending with the release of finished products.

The duration of the production cycle of an enterprise is determined by the following formula:

PC = POpz + POnzp + POgp,

where PC is the duration of the production cycle of the enterprise, days;

POpz - period of turnover of stocks of raw materials, materials and semi-finished products, days;

POzp - period of turnover of work in progress, days; POgp - period of turnover of finished goods inventories, days.

The production process includes several stages:

Storing production inventories from the moment they are received at the warehouse until they are released into production;

Production;

Storage of finished products.

Financial cycle-- this is the period of time between the deadline for paying your obligations to suppliers and receiving money from customers. In other words, this is the period during which funds invested in current assets complete one full turnover.

The duration of the financial cycle (or cash flow cycle) in an organization is determined by the following formula:

FC = PPC + POdz - POkz,

where FC is the duration of the financial cycle (cash turnover cycle) in the organization, days; PC - duration of the organization's production cycle, days; POdz - average receivables turnover period, days; POkz - average period of turnover of accounts payable, days.

There is a close relationship between the duration of an organization’s production and financial cycles, reflected in the concept of “operating cycle”

The operating cycle characterizes the total time during which cash is stored in inventories and accounts receivable. Since the organization pays supplier bills with a time lag, the financial cycle is less than the operating cycle for the period of time of circulation of accounts payable.

The operating cycle characterizes the turnover period of the organization's total working capital and is calculated using the following formula:

OTs = PC + POdz,

where OTs is the duration of the organization’s operating cycle, days; POdz - duration of receivables turnover, days.

From the above formulas it follows that a reduction in operating and financial cycles is a positive trend in capital management, which can occur as a result of:

Reducing the time of the production process (the period of storage of inventories);

Rational reduction in the duration of production of the finished product and the period of its storage in the warehouse;

Use of progressive forms of logistics (Japanese kanban system);

Accelerating accounts receivable turnover;

Slowdown in accounts payable turnover.

PRODUCTION AND FINANCIAL CYCLES OF THE ENTERPRISE AND THEIR RELATIONSHIP

Analysis of the structure of own working capital demonstrates the importance of time characteristics for working capital management. In this regard, the distribution of the need for current assets over time is of particular importance. For these calculations, a methodology is used based on the duration of the financial and operational cycle and the planned costs of current activities.

The duration of the financial and operational cycle in the production sector includes the duration of delivery, manufacturing and assembly of products, as well as the period of their sale, waiting for repayment of accounts receivable.

In production, the cycle begins from the moment materials are released from the enterprise's warehouse and ends with the shipment of finished products to the buyer, which are made from these materials.

The financial cycle begins with the transfer of funds to suppliers when paying off accounts payable and ends when receiving money from customers for shipped products when paying off accounts receivable, i.e. This is the period of time between the deadline for paying your obligations to suppliers and receiving money from buyers (debtors). It characterizes the period of time during which own working capital makes a full turnover.

The financial cycle, or cash circulation cycle, is the time during which funds are withdrawn from circulation. The duration of the financial cycle in days of turnover can be calculated as the difference between the duration of the operating cycle and the time of circulation of accounts payable. The purpose of working capital management is to shorten the financial cycle. Reducing the duration of the financial cycle means reducing the turnover period of own working capital.

35. Cash flows of an enterprise: their composition and classification.

One of the most important areas of financial management of organizations (enterprises) is cash flow management. The importance of this aspect of financial management is due primarily to the fact that in modern conditions cash is one of the most limited resources and the success of an organization in production and commercial activities largely depends on the efficiency of its use, which implies attaching exceptional importance to the issues of planning and control of cash flow . Organizational cash flow management is inextricably linked with the self-financing strategy, since it involves identifying

the relationship between cash flows and the organization’s profit (the so-called profit paradox). Finally, a comprehensive assessment of the financial condition of an enterprise is impossible without analyzing its cash flows, etc.

Meanwhile, one should distinguish between concepts such as “cash flow” and “cash flow”. And if the first of them implies the gross receipts and payments of the enterprise and is the basis of finance, then the second, in contrast to the simple act of receiving/transferring funds, is characterized by the following features:

Cash flow reflects the result of the movement of money;

Cash flow is organized and controlled;

Cash flow is subject to time constraints;

Cash flow has a number of economic characteristics: intensity, liquidity, profitability, etc.

In general, cash flow - an analogue of the English cashflow (cash flow) is the result of the movement of funds of an enterprise for a given period of time, or it is the difference between the receipts of funds of the enterprise and their payments for a certain period.

Cash flow reflects the movement of funds, which in some cases are not taken into account when calculating profits: investment expenses, tax payments, taxes paid from profits; payments to repay the principal amount of the debt, etc.

For a deeper disclosure of the essence of cash flows and their effective management, it is necessary to carry out classification according to the following main characteristics (Table 8.1).

The concept of “enterprise cash flow” is aggregated and includes numerous types of these flows serving economic activities. In order to ensure effective targeted management of cash flows, they require a certain classification. This classification of cash flows is proposed to be carried out according to the following main characteristics:

1. Based on the scale of servicing the economic process, the following types of cash flows are distinguished:

Cash flow throughout the enterprise is complete. This is the most aggregated type of cash flow, which accumulates all types of cash flows serving the economic process of the enterprise as a whole;

Cash flow for individual structural divisions (responsibility centers) of the enterprise. Such differentiation of an enterprise's cash flow defines it as an independent object of management in the system of organizational and economic structure of the enterprise;

Cash flow for individual business transactions. In the system of the economic process of an enterprise, this type of cash flow should be considered as the primary object of independent management.

2. By type of economic activity, in accordance with international accounting standards, the following types of cash flows are distinguished:

Cash flow from operating activities. It is characterized by cash payments to suppliers of raw materials and materials; to third-party providers of certain types of services that provide operational activities: wages to personnel involved in the operational process, as well as those managing this process; tax payments of the enterprise to budgets of all levels and to extra-budgetary funds; other payments related to the implementation of the operational process. At the same time, this type of cash flow reflects cash receipts from product buyers; from tax authorities in order to recalculate overpaid amounts and some other payments provided for by international accounting standards;

Cash flow from investing activities. It characterizes payments and receipts of funds associated with the implementation of real and financial investments, the sale of retiring fixed assets and intangible assets, the rotation of long-term financial instruments of the investment portfolio and other similar cash flows serving the investment activities of the enterprise;

Cash flow from financing activities. It characterizes the receipts and payments of funds associated with attracting additional share capital or share capital, obtaining long-term and short-term loans and borrowings, payment in cash of dividends and interest on deposits of owners and some other cash flows associated with the implementation of external financing of the economic activities of the enterprise.

3. Based on the direction of cash flow, there are two main types of cash flows:

Positive cash flow, characterizing the totality of cash flows to an enterprise from all types of business operations (the term “cash inflow” is used as an analogue of this term);

Negative cash flow characterizing the totality of cash payments by an enterprise in the process of carrying out all types of its business operations (the term “cash outflow” is used as an analogue of this term).

When characterizing these types of cash flows, you should pay attention to the high degree of their interrelation. The insufficiency of volumes in time of one of these flows causes a subsequent reduction in the volumes of another type of these flows. Therefore, in the enterprise's cash flow management system, both of these types of cash flows represent a single (complex) object of financial management.

4. According to the volume calculation method, the following types of cash flows of an enterprise are distinguished:

gross cash flow. It characterizes the entire totality of receipts or expenditures of funds in the period of time under consideration in the context of its individual intervals;

Net cash flow. It characterizes the difference between positive and negative cash flows (between the receipt and expenditure of funds) in the period under consideration in the context of its individual intervals. Net cash flow is the most important result of the financial activity of an enterprise, largely determining the financial balance and the rate of increase in its market value.

The calculation of net cash flow for the enterprise as a whole, its individual structural divisions (responsibility centers), various types of business activities or individual business transactions is carried out using the following formula:

NDP = PDP-ODP,

NPV - the amount of net cash flow in the period under consideration;

PDP - the amount of positive cash flow (cash receipts) in the period of time under consideration;

ECF is the amount of negative cash flow (cash expenditure) in the period of time under consideration.

As can be seen from this formula, depending on the ratio of the volumes of positive and negative flows, the amount of net cash flow can be characterized by both positive and negative values, which determine the final result of the corresponding economic activity of the enterprise and ultimately influence the formation and dynamics of the size of the balance of its monetary assets .

5. Based on the level of volume sufficiency, the following types of cash flows of an enterprise are distinguished:

Excess cash flow. It characterizes a cash flow in which cash receipts significantly exceed the enterprise’s real need for targeted spending. Evidence of excess cash flow is a high positive value of net cash flow that is not used in the process of carrying out the economic activities of the enterprise;

Deficient cash flow. It characterizes a cash flow in which cash receipts are significantly lower than the real needs of the enterprise for their targeted spending. Even if the amount of net cash flow is positive, it can be characterized as deficit if this amount does not meet the planned need for spending cash in all planned areas of the enterprise’s economic activity. A negative value of the amount of net cash flow automatically makes this flow scarce.

6. According to the time estimation method, the following types of cash flow are distinguished:

Real cash flow. It characterizes the cash flow of an enterprise as a single comparable value, reduced by value to the current point in time;

Future cash flow. It characterizes the cash flow of an enterprise as a single comparable value, reduced by value to a specific upcoming point in time. The concept of future cash flow can also be used as its nominal identified value at a future point in time (or in the context of intervals of a future period), which serves as a discounting base for the purpose of bringing it to the present value.

The types of cash flow of an enterprise under consideration reflect the content of the concept of assessing the value of money over time in relation to the business operations of the enterprise.

7. Based on the continuity of formation in the period under review, the following types of cash flows of an enterprise are distinguished:

Regular cash flow. It characterizes the flow of receipts or expenditures of funds for individual business transactions (cash flows of one type), which in the time period under consideration is carried out continuously at separate intervals of this period. Most types of cash flows generated by the operating activities of an enterprise are regular in nature: flows associated with servicing a financial loan in all its forms; cash flows ensuring the implementation of long-term real investment projects, etc.;

Discrete cash flow. It characterizes the receipt or expenditure of funds associated with the implementation of individual business transactions of the enterprise in the period of time under consideration. The nature of a discrete cash flow is a one-time expenditure of funds associated with the acquisition by an enterprise of an integral property complex; purchasing a franchising license; receipt of financial resources in the form of gratuitous assistance, etc.

When considering these types of cash flows of an enterprise, you should pay attention to the fact that they differ only within a specific time interval. Given a certain minimum time interval, all cash flows of an enterprise can be considered discrete. And vice versa - within the life cycle of an enterprise, the predominant part of its cash flows is of a regular nature.

8. According to the stability of time intervals of formation, regular cash flows are characterized by the following types:

section i. cash flow management

Regular cash flow with uniform Time intervals within the period under review. Such a cash flow of receipt or expenditure of funds is in the nature of an annuity;

Regular cash flow with uneven time intervals Within the period under review. An example of such a cash flow is a schedule of leasing payments for leased property with uneven time intervals agreed upon by the parties for their implementation throughout the leasing period of the asset.

The considered classification allows for more targeted accounting, analysis and planning of cash flows of various types at the enterprise.

Unit of measurement: days

Explanation of the indicator

The period of the operating cycle (English equivalent - Operating Cycle) is an indicator of business activity that shows the time of transformation of the company's reserves into money. Thus, a company's operating cycle is the time between purchasing inventory and receiving money for goods sold or services provided (money received from both sales and receivables).

For example, a clothing store bought ready-made clothes and sold them to the customer for cash. The relatively short period of time between the purchase of clothing and its sale reflects a short operating cycle. Unlike a clothing store, a machine tool manufacturer first purchases materials and components, after which direct production occurs, and then provides it to customers with deferred payment. As a result, the operating cycle for a machine tool manufacturer is significantly longer than that of a clothing store. There are industries in which this period exceeds a year, for example, ship manufacturers.

The indicator is calculated as the sum of one inventory turnover and the average receivables repayment period.

Standard value of the operating cycle:

It is desirable to reduce the indicator during the study period. To determine the company's position, it is advisable to compare the value with its main competitors. It is desirable that the companies that are selected for comparison are also approximately the same size (for example, if you compare the amount of assets).

Directions for solving the problem of finding an indicator outside the standard limits

A reduction in the value of the indicator can be achieved both by optimizing the production process and by increasing the efficiency of accounts receivable management. Reducing the average repayment period for receivables will reduce the duration of the operating process.

Formula for calculating the operating cycle:

The approximate value of a company's operating cycle can be calculated as follows:

Operating cycle period = Period of one inventory turnover + Receivables collection period (1)

This indicator can be broken down into its components as follows:

Operating cycle period = (360 * Average annual inventory) / Cost) + (360 * Average annual accounts receivable) / Revenue) (2)

When calculating the indicator, it is worth remembering that inventory and receivables turnover may be underestimated. If a company uses a classic business year (end December 31) and the indicator is calculated based on the values ​​at the beginning and end of the year, then the indicators may not reflect the real situation. Therefore, it is advisable to use values ​​at the end of the month or working day.

Average annual inventory (most correct method) = Sum of inventory at the end of each working day / Number of working days (3)

Average annual inventory (if only monthly data is available) = Sum of inventory at the end of each month / 12 (4)

Average annual inventory (if only annual data is available) = (Beginning of year inventory + End of year inventory) / 2 (5)

It is worth calculating the average repayment period for receivables in the same way.

Average annual amount of accounts receivable (most correct method) = Sum of accounts receivable at the end of each working day / Number of working days (6)

Average annual accounts receivable (if only monthly data is available) = Sum of accounts receivable at the end of each month / 12 (7)

Average annual amount of accounts receivable (if only annual data is available) = (Amount of accounts receivable at the beginning of the year + size of accounts receivable at the end of the year) / 2 (8)

Example of operating cycle calculation:

Company OJSC "Web-Innovation-plus"

Unit of measurement: thousand rubles.

Operating cycle period (2016) = (360*(234/2+284/2))/ 3781+ (360*(405/2+341/2))/ 4517= 54.39 days

Operating cycle period (2015) = (360*(284/2+301/2))/ 3772+ (360*(341/2+254/2))/ 4509= 51.67 days

During 2015-2016, the operating cycle of Web-Innovation-plus OJSC increased from 51.67 days to 54.39 days. The continuous reduction in the duration of the production process had a positive impact on the efficiency of the operational process. However, under the influence of the constant increase in the amount of accounts receivable, the operating cycle increased. Reserves for reducing the indicator must be sought specifically in the area of ​​accounts receivable management. Optimizing the commodity lending policy will reduce the average annual amount of debt, which will lead to an increase in the financial performance of the company.

Alexander Lednev Deputy General Director for Economics and Finance of JSC TransWoodService (Russian Railways)
Magazine “Financial Director”, No. 2 for 2011

Calendar

Revenue for the period excluding VAT, rub.

Total cost of shipped products, rub.

Budget of income and expenses

Material costs for shipped products, rub.

Budget of income and expenses

Cash balance, rub.

Forecast balance

Remaining stocks of raw materials and materials, rub.

Forecast balance

Remains of work in progress, rub.

Forecast balance

Remains of finished products, rub.

Forecast balance

Accounts receivable, rub.

Forecast balance

Accounts payable for supplies of raw materials, rub.

Forecast balance

Other accounts payable, rub.

Forecast balance

Interim calculation indicators

Period of cash balance turnover, days.

Turnover period for raw materials and supplies, days.

(MZ x T): M

Work in progress turnover period, days.

(NZ x T) : PS

Turnover period of finished goods inventories, days.

(GP x T) : PS

Receivables collection period, days.

(DZ x T): (H x 1.18)

Turnover period of accounts payable for supplies of raw materials, days.

(KZ x T): (M x 1.18)

Turnover period of other accounts payable, days.

(PKZ x T): (PS x 1.18)

From the point of view of any financier, the operating cycle is the time of complete turnover of the entire amount of current assets. To put it simply, this is the number of days that elapse from the moment raw materials arrive at the company’s warehouse until the finished product is sold. Another, no less important indicator that helps control the financial stability of an enterprise is the duration of the financial cycle (the time from the moment of payment for raw materials until the receipt of funds for shipped products). The meaning of the company's operating and financial cycles is clearly presented in the diagram.

Drawing. Financial and operating cycles of a manufacturing enterprise

You can calculate the duration of the operating cycle (OCC) if you use the following formula (interpretation of symbols, sources of initial data and intermediate indicators used in calculating the operating cycle are presented in Table 1):

POTs = POD + POMZ + PONZ + POGP + PODZ.

The formula for calculating the duration of the financial cycle will look like this (the explanation of the symbols is in Table 1):

PFC = POC - POCZ - POPKZ.

Practice experience

Mikhail Katsnelson, Vice President for Finance and Economics of ZAO Lunch

We budget and track both cycles on a monthly basis and individual components on a weekly basis. If the standards are exceeded, we take the necessary steps. Working capital is financed as much as possible at the expense of a creditor, and the balance at the expense of short-term credit instruments (overdrafts and lines of credit), since the use of equity capital is more profitable in investment activities (opening new points, ERP systems, etc.).

Having information about the duration of the financial cycle, it is easy to determine the real need of the enterprise for the funds it needs to finance the process of manufacturing and selling products. The total need for working capital is calculated as the product of the operating cycle and average daily expenses (the ratio of production cost (PC) to the number of calendar days in the period (T)). The source of financing working capital can be either equity or borrowed capital. Actually, this is not new; loans to replenish working capital are a normal practice for many companies. But due to the fact that enterprises often estimate by eye how much money to borrow from the bank, moreover, they ask for amounts with a reserve, the profitability of the business decreases.

So, after the procedure for calculating the operating and financial cycles has been determined, you can move on to a model for managing the financial stability of the company.

Financial stability management model

All that is required to create a model with the help of which the financial director can plan and assess the acceptability of the level of current liquidity, calculate the need for short-term loans to replenish working capital, is information from the budget of income and expenses (BDR), as well as some projected values ​​​​of balance sheet items . A mandatory requirement is a monthly breakdown in budgets. The more often control over budget execution and, as a result, control over the financial stability of the enterprise is exercised, the better. What specific items from the budget of income and expenses and the forecast balance will be required for calculations are shown in Table 2. It is also necessary to calculate turnover indicators and determine the duration of the financial and operating cycles (see Table 3).

When all the necessary initial data have been obtained, you can begin to calculate the indicators of the business financial stability management model (see Table 4). For the financial director, the most important indicators will be the following:

The need for short-term loans to replenish working capital;

The planned value of the current liquidity ratio.

The need for short-term loans is defined as the difference between the total need for working capital for the period (the calculation of which was described in detail above) and own working capital.

And the calculation of the planned value of the current liquidity ratio (CTL) can be performed using the following formula:

Planned Ktl = Duration of the operating cycle x Average daily expense of funds / Short-term liabilities.

Table 2. Initial data for constructing a financial stability model, thousand rubles.

		Source	Date on which the data is presented
	Cash
	Accounts receivable
	Stocks of raw materials and supplies, net
	Unfinished production
	Finished goods inventories, net
	Advances issued (except for advances on fixed assets)
	Commercial accounts payable
	Permanent liabilities (wages and taxes)
	Advances received - external
	Sales revenue, excluding VAT
	Raw materials for sold products
	Cost of goods sold
	Number of days in the period	Calendar

Table 3. Data on turnover, days.

	Indicators
	"Receivable"
	Cash
	Advances issued*
	Raw materials reserves
	Unfinished production
	Finished goods inventories
	Advances received
	"Lender" for the supply of raw materials and materials
	Other "creditor"
	Operating cycle
	Financial cycle

*Excluding advances on fixed assets.

Table 4. Model for managing the financial stability of a business

	Indicators	Date on which calculations were made
	Average daily expenditure, thousand rubles.
	Total need for working capital, thousand rubles.
	Short-term liabilities, thousand rubles.
	Requirement for financing working capital, thousand rubles.
	Own working capital, total, thousand rubles.
	Need for short-term loans, thousand rubles.
	Planned current liquidity, units.

The proposed model allows you to track how changes in the operating and financial cycles affect the value of the current liquidity ratio. For example, Table 4 shows that in the first quarter the company had a fairly high current ratio of 1.9. After the first quarter the situation changes dramatically. The company revised the terms of work with suppliers - they received a deferred payment for two months instead of one. And accordingly, current liquidity decreased to 1. This means that the enterprise can manage practically without its own working capital.

But, as can be seen from Table 4, in August and September, when the company increased its reserves of raw materials, there was no increase in liquidity. On the contrary, the coefficient value decreases from 1.9 to 1.5. This is explained by the fact that the acquisition of additional raw material reserves is planned to be financed through short-term debt.

Practice opinion

Dmitry Kostylev, financial director of TD "Olant"

I agree with the author. It is necessary to carefully plan possible changes in turnover, primarily “creditors”, “debtors” and inventories. If this rule is not observed, then even in the case of positive operating profitability, the company will have overdue obligations to suppliers, which may lead to a deterioration in the terms of trade credit from suppliers. In addition, banks usually require their own working capital. True, historically this applies primarily to companies engaged in wholesale trade (it is necessary to create a reserve for overdue receivables). In our company, we primarily pay attention to regulating the required ratio of turnover periods for accounts payable to suppliers, on the one hand, and inventory and accounts receivable for mutual settlements with customers, on the other. The turnover period of these types of current assets must not be lower than the turnover period of the “creditor”. Moreover, there will be a practical result if the analytics are detailed down to the brand and product category. This rule is especially important for an extensive assortment of several tens and hundreds of thousands of product items.

In conclusion, it is worth noting that understanding the essence of the operating and financial cycles provides all the necessary information to calculate the need for own working capital. But for this, the financial director must understand the essence of the business, understand how the enterprise’s business processes are structured, how optimal they are and whether there are reserves for their optimization.

And further. When making calculations, it is necessary to take into account the fact that the value of own current assets constantly changes throughout the year, therefore it is important to constantly monitor changes in model parameters, monthly comparing planned and actual indicators. The system proposed in the article is ideally suited for these purposes. And in order for not only the financial director to understand the significance and importance of the timing of the financial and operating cycles, their impact on the financial stability of the business, it would be useful to establish the responsibility of managers for each element of the operating cycle. This can be done by linking the existing system of bonuses and bonuses with relevant indicators.

The current activities of an organization can be represented in the form of a continuous circulation of assets. Resources are transformed and transformed from one form to another - from paying for raw materials and supplies to suppliers to manufacturing finished products, creating accounts receivable and returning funds from customers. This relationship is typical not only for production, but also for performing various works or providing services. How to determine the duration of the financial cycle? Calculation formulas and ready-made tools for analyzing and monitoring this indicator are given below.

Financial cycle period

In economics, the financial cycle of an enterprise is the time period of complete turnover of its own working capital. The beginning is the acquisition of materials, the end is the receipt of payments from customers. In other words, the duration of the financial cycle indicates the period that begins from the moment of payment to suppliers for materials - the moment of repayment of accounts payable, and ends at the moment of receiving money from customers for shipped products - the moment of repayment of accounts receivable.

The shorter this period, the faster the funds spent are returned to the organization. The more revolutions finance can make. And since repayment of accounts receivable includes the payment of a markup, the more profit the company receives as a result.

Financial cycle calculation

The calculation process requires data on the turnover periods of accounts payable and receivable, as well as inventory. As a rule, this information is taken by users from accounting programs - for example, 1C. Summary accounting data can be found in the balance sheet for the required period, in account analyzes and other registers.

Financial cycle = Inventory turnover period + Inventory turnover period – Inventory turnover period,

• The inventory turnover period is also the production cycle;
• DZ – accounts receivable;
• KZ – accounts payable.

Or the calculation formula can be presented as follows:

Financial cycle = 360 / KOZ + 360 / KOZ – 360 / KOKZ,

• KOZ – inventory turnover ratio.
• KODZ – accounts receivable turnover ratio.
• KOKZ – accounts payable turnover ratio.

The higher the financial cycle indicator, the slower the funds are returned to the company and the greater the business’s need for money. If a negative financial cycle is formed, this means that:

1. Product suppliers are so loyal that they are willing to wait not only until your company produces products from their raw materials and sells them, but they do not even demand payment for raw materials until your company receives payment from buyers of products that were made from these raw materials. There are such suppliers - but they are always connected parties, for example, another company of your founder.
2. You have an error in calculating the financial cycle, and it is due to the fact that the inventory turnover period does not reflect the real duration of the production cycle. Perhaps the company produces services, or perhaps you only took into account the period of turnover of materials and forgot about the period of turnover of work in progress and finished products. Perhaps you do not have work in progress balances at the end of the month, but nevertheless, some time is spent on producing products from raw materials, but this figure cannot be calculated from monthly accounting reports.

If the supplier is still not a related party, and the financial cycle is negative and there are no errors in the calculations, this means that this is an overdue debt to the supplier, and your company is not able to obtain a bank loan in order to pay suppliers on time. This is a very sad situation, since suppliers will either stop working with your company and the continuity of the organization’s activities will be disrupted, or even file for bankruptcy of your organization.

If, during a negative financial cycle, you have a cash balance sufficient to repay the most urgent debts to suppliers and liquidity indicators are normal, this clearly indicates working with related parties and deliberate non-payment of debts to creditors.

Working with connected parties as product suppliers is not so scary in the short term. However, if the trend continues for a long time, problems arise with liquidity and solvency, since the business becomes completely dependent on borrowed funds, including an increase in accounts payable and the lack of its own safety stock. In this case, the enterprise does not have the motivation to accelerate the turnover of receivables and inventories and operates ineffectively, because is credited free of charge at the expense of other companies of the founder.

In many service sector enterprises, the specifics of the business are such that the production cycle is difficult to calculate based on financial reporting indicators. When calculating the financial cycle at manufacturing enterprises (usually material-intensive), the inventory turnover ratio is used to calculate the production cycle. The income of service sector enterprises is not directly related to the turnover of their inventories, which are represented mainly by office supplies and other materials used to support office premises, therefore, based on the inventory turnover indicator, it is impossible to judge the size of the production cycle. Thus, using conventional approaches to calculating the financial cycle in such companies, one can unreasonably neglect the production cycle and come to the wrong result (the financial cycle may turn out to be negative).

Since the production cycle is the period of time between the beginning and end of the production process for a specific product within one enterprise, the average duration of one order can be taken to determine its value.

During this time, the company incurs certain costs associated with labor costs, technological maintenance of equipment, etc. Since companies provide different types of services, the prices for which are also different, for each type of service you need to randomly select several orders, and then determine the weighted average duration of the order. The share of sales of a given type in total sales can be used as weights.

For example, consider 2 models of enterprise management. One of them will be effective, the second will not. To understand how the calculated indicators are interrelated, we present the data in the table. Then we will define the financial cycle.

Table 1. Calculation based on the example of effective management - the financial cycle tends to zero.

Table 2. Calculation based on the example of ineffective management - the financial cycle is less than zero.

From the tables it can be seen that the calculation of the financial cycle is influenced by many conditions, and not just the period of turnover of accounts payable. A general analysis of the indicator should be carried out using a factorial method, which includes periods of inventory turnover, accounts receivable and accounts payable.

This is especially important for companies providing services. Such organizations do not have finished products, which means that the calculation of the production and financial cycle must be done according to a different principle. When an enterprise sells services to consumers, the production cycle is considered to be the duration of the provision of an individual service, that is, the period of execution of one order.

With the traditional method of calculation through inventory turnover, such firms will have a negative financial cycle, which is fundamentally wrong. To obtain correct results, the production cycle must take the period of time from the date of actual provision of the service to the date of receipt of payment from the customer.

How to Perform a Financial Cycle Analysis

Therefore, the financial cycle is the difference in calendar days between receiving money from our customers and transferring funds to suppliers. The circulation of working capital includes 3 main stages - procurement and supply with the formation of accounts receivable, production and sales with the formation of accounts payable. If you combine the first 2 stages, you get an operating cycle. During the analysis process, it is the most labor-intensive to influence the production cycle, since it is impossible to manufacture products without first purchasing raw materials.

The operating and financial cycles are closely interconnected. The shorter the first one, the faster the organization receives funds from settlements with customers. The volume of incoming cash flows increases, the need for additional financing and lending decreases. Current assets make a greater number of annual turnovers; for every ruble of money invested, the company receives more profit.

In order to effectively manage the financial cycle, firstly, it is necessary to analyze FC indicators over time, over several periods and by component factors. Secondly, measures should be developed to optimize management. The following actions bring practically good results:

1. Reducing the production cycle period is accomplished by reducing the period of purchasing materials, modernizing production and equipment, and minimizing the storage time of finished products in warehouses. Optimization will be helped by the XYZ analysis method, inventory management, automation of logistics processes, market analysis and demand changes, etc.
2. Reducing the period for repayment of receivables - the development of credit policy should be carried out taking into account the fastest possible collection of debts without increasing excessive pressure on buyers. To speed up sales, various incentive measures should be used, including discounts, deferred and installment payments, etc. Regular reconciliations with customers, ranking of obligations by timing and volume, and avoidance of delays in payments become a prerequisite for debt control.
3. Increasing the period for fulfilling creditor obligations - optimal payment terms are achieved through concluded agreements, including the search for suppliers who are ready to cooperate on the most favorable terms. Management of outgoing cash flows must be structured according to the lender’s payment repayment calendar in order to eliminate the human factor and “over-the-phone” settlements.

Conclusion: managing the duration of the financial cycle is an effective and efficient tool for providing an enterprise with its own funds. To achieve results in practice, and not in theory, you need to strive to reduce the period of the financial cycle not on a one-time basis, but on a regular basis. To achieve this, management implements optimal business processes that require constant analysis and control. It is recommended to use Excel models, 1C and management accounting as daily assistants.

Financial model for analyzing the duration of the financial cycle

On our website you can download a financial model for free to analyze the duration of the financial cycle based on 1C accounting data. The key feature of this model is that financial cycle indicators are calculated based on accounting entries. For example, you have 10 product buyers - and each of them has receivables as of the reporting date. For two buyers, the debt is doubtful and overdue, there have been no payments for a year, but the reserve for doubtful debts is not reflected in the accounts. Two buyers pay for the products within 30 days, two more - within 45 days, the rest - within 90 days. If you calculate the receivables turnover period based on reporting by dividing the total amount of receivables by revenue, you will get an average debt turnover period of somewhere between 90 and 120 days.

Our financial model will exclude doubtful debts from the calculation, even if no reserves have been accrued for them, since it calculates the turnover for each counterparty and excludes from the calculation those for which the turnover is too low. As a result, you will find out how long it will take to receive funds from debt repayments by solvent counterparties. In this case, the turnover will be calculated taking into account the share of the revenue of each counterparty in the total revenue. If 2 counterparties who pay within 30 days generate 90% of the revenue, and the remaining 6 counterparties generate the remaining 10%, then the financial cycle will be equal to 30 days according to our financial model.

In addition, the program allows you to monitor changes in the duration of the financial cycle on a monthly basis and perform factor analysis. That is, it determines why the financial cycle increased or decreased. Is this change caused by an acceleration in the turnover of accounts receivable, or by optimization of work with suppliers and a slowdown in the turnover of accounts payable due to the consolidation of lots? It allows you to monitor the relationship between the turnover period of accounts receivable, inventory and accounts payable on a monthly basis on one chart.

In the article we will look at how the duration of the operating cycle is calculated in the financial analysis of an enterprise and highlight the key differences from the financial and production cycle. This indicator can be calculated both for an existing company and in a startup business plan.

Operating cycle time

Operating cycle time– the period of time from the moment of purchase of raw materials and supplies to payment for manufactured products. In other words, the duration of the operating cycle reflects the turnover of the company's current assets and shows the number of days required to transform raw materials into cash.

Formula for calculating the duration of the operating cycle

To estimate the time of one turnover of raw materials and supplies, it is necessary to add up the periods of turnover of receivables and inventories. The calculation formula is as follows:

T ots – duration of the operating cycle (in days);

Т odz – receivables turnover period (in days);

T oz – period of inventory turnover and costs;

The accounts receivable turnover ratio is calculated as the ratio of revenue from product sales to the volume of accounts receivable:

The inventory and cost turnover ratio is defined as the ratio of revenue from sales of products to the amount of inventory and costs of the enterprise:

The relationship between the operating cycle and the production and financial cycle

The entire operational cycle of product production consists of two cycles: production and financial. Each of them reflects different aspects of cash and production management.

The figure below shows the relationship between the operating, production and financial cycle.

Operating cycle time analysis

To assess the financial condition of an enterprise, it is necessary to assess the trend in the operating cycle over several years. The table below shows this analysis.

Summary

Operating cycle management is an important criterion for the long-term sustainable development of a company. The task of management is to reduce both the production and financial cycle, which will increase the turnover and efficiency of managing current assets and business processes of the enterprise.