Operating and financial cycles. Production cycle, financial cycle, operating cycle. Cost of goods sold, thousand rubles
One of the indicators that indicate the degree of "health" of the organization is the length of the financial cycle. To calculate it, you will need data on the duration of the production cycle, as well as the turnover periods of accounts payable and receivable. A decrease in this value in dynamics speaks of effective management decisions regarding the use of the company's working capital and makes it attractive in the eyes of banks and partners.
The financial cycle of the enterprise(English Cash Conversion Cycle) is a financial indicator that characterizes the length of time in days between the payment of accounts payable and the return of accounts receivable to the organization.
In other words, this is the number of days between payment for raw materials and materials from our organization to suppliers and receiving money for the finished products shipped by us to customers.
Let's consider the details on the example of an agricultural enterprise LLC "Farmer", which is engaged in crop production.
There are three main types of cycles:
- Operating cycle.
It is the time that passes from the purchase of raw materials and materials, for example, seeds and fertilizers, to receiving money for the products grown and sold from them. In this case, the date of purchase of raw materials may not coincide with the date of payment to the seller for it. This is how payables are formed.
Reference. Accounts payable is a debt to a party to the transaction that is required to be repaid. It is accepted to be called "creditors".
Shipment day finished products LLC "Farmer", for example, wheat, may also not coincide with the day of receipt of funds for it from the buyer. In this case, a receivable arises.
Reference. Accounts receivable is the debt of buyers for services rendered and goods shipped. It is commonly called "accounts receivable".
- Production cycle.
The time interval from the receipt of raw materials and materials by LLC "Farmer" to the release of finished products and their placement in the warehouse. This indicator is associated with the movement of stocks from sowing seeds to harvesting the finished crop. Purchased seeds go to the warehouse in the form of raw materials, then, when sown, they are transformed into work in progress (growing period), then, at the time of collection from the field, they become finished products and are placed in the warehouse for further sale.
Important. The financial and production cycles of an enterprise, as a rule, are enclosed within an operating one.
- Financial cycle.
The number of days of movement of money from payment to suppliers to receipt of funds from buyers. As long as the funds of LLC "Farmer" are within this cycle, they are not exactly money in the usual sense. The money is locked inside the process. They cannot be removed without breaking the entire mechanism. They are considered working capital.
Reference. Working capital is funds that are involved and fully spent within one production cycle.
The formula for calculating the financial cycle:
Financial cycle (in days) = production cycle (in days) + POD - POCZ
SUBZ - the period of turnover of receivables;
POKZ - the period of turnover of accounts payable.
The formula for calculating the production cycle:
PC = duration technological cycle+ time of breaks + period of natural processes
SUBZ = accounts receivable (amount as of a certain date): revenue: 365 (number of days in a year).
The formula for calculating the turnover period of the "creditor":
POKZ = accounts payable (amount as of a certain date): purchase: 365 (number of days in a year).
On the example of the indicators of LLC "Farmer"
For example, in April, LLC "Farmer" began sowing corn, while it did not have its own funds for the purchase of seeds, fertilizers and fuel. I had to take raw materials "for the harvest" from suppliers for 195 days. Field work was done, and after 6 months, in October, it was time to harvest. The CEO managed to negotiate with the buyer to sell all the corn at a bargain price, but with the condition that the money would be received only 15 days after the product was shipped. In this case, the financial cycle is zero.
This is an example of ideal money management efficiency. LLC "Farmer" used borrowed resources in its activities exactly until the moment when they had to pay the bills. It fulfilled its obligations to the supplier of raw materials and made a profit from the deal on the sale of the crop, without "freezing" its own money within the cycle.
If general manager LLC "Farmer" used only its own resources, it would not be burdened with the risks of non-repayment of debts, for example, in the event of the loss of the crop. At the same time, the organization's money would be locked inside a cycle for 195 days - this is an example of not effective use capital. In such cases, they say "did not take risks."
Positive and negative values of the financial cycle
It is incorrect to say unequivocally that a positive value in calculating a financial cycle is bad, and a negative value is good. This indicator is needed financial managers companies to run it.
If the indicator takes a negative value, then this means that the organization has a lot of its own money, and it does not need to replenish its working capital. It can even issue loans itself.
Sounds good and reliable, but it suggests that the organization is minimizing risk, acting too cautiously, and thus missing out on opportunities. Efficiency drops.
On the contrary, a positive value indicates a high dependence on creditors and debtors. Too much money trapped within the cycle is losing its liquidity.
If LLC "Farmer" finds itself in such a situation, then even small delays in payment from buyers will lead to a cash gap. This is tantamount to a pinched business blood artery. You will have to borrow money from a bank or look for suppliers with even longer delays.
The ideal situation in the company is achieved by optimizing accounts payable and receivable. Reduction of accounts receivable without compromising service and loyalty for buyers and increasing creditors without the risk of deteriorating solvency.
Reference. Liquidity is the ability of assets to turn into money. For example, money as an asset is as liquid as possible, and an old warehouse building in the thicket of a forest is low liquid, since it is almost impossible to sell it.
Who calculates the financial cycle and why
This indicator is used by analysts and financiers to get the most accurate picture of the performance of an enterprise. It is interesting in combination with other coefficients and indicators that allow us to draw a conclusion about the financial condition of a particular organization.
So, for example, many banks, before issuing a loan, assess financial position potential borrower. Cycle time information is also used by company managers to make management decisions.
Important: the indicator of the duration of the financial cycle is most interesting when evaluating in dynamics. If, when analyzing several key dates, there is a tendency to increase its value, then this may indicate problems in relationships with partners. For example, debtors do not pay bills on time, or, on the contrary, the organization itself allows delays in fulfilling obligations.
Tatiana Manets - candidate economic sciences, an auditor and consultant with fifteen years of experience, in his video talks about what the financial cycle is, what indicators are involved in its calculation and what can be revealed with its help.
Any industrial enterprise goes through a loop operating activities, during which inventories are purchased, finished products are produced and sold for cash cash or on credit and, finally, the receivables are repaid from the receipt of funds from customers. This cycle is called operational. The operating cycle reflects the length of time during which current assets make a full turn.
Figure # 1. Relationship between production and financial cycles
As part of operating cycle there are several components:
The turnover cycle of inventories (production cycle) is the average time (in days) required to transfer inventories from the form of materials (raw materials) to finished products and their sale. Thus, the production cycle is a period of time that begins from the moment the materials arrive at the warehouse and ends at the moment the finished product is shipped to the buyer, which was made from these materials.
Accounts receivable turnover cycle is the average time required for buyers to pay off accounts receivable arising from credit sales.
Accounts payable turnover cycle is the average time elapsing from the moment the enterprise purchases inventories until the payment of creditors' invoices.
The financial cycle is calculated based on the above components.
Financial cycle- this is the gap between the term of payment for its obligations to suppliers and the receipt of money from buyers (debtors). In other words, it characterizes the period of time during which their own circulating assets make a full turnover.
Financial cycle = Production cycle + Accounts receivable turnover period - Accounts payable turnover period
The reduction in operating and financial cycles over time is seen as a positive trend. It can happen by accelerating the production process (the period of storage of inventories, reducing the duration of manufacturing of finished products and the period of its storage in the warehouse), accelerating the turnover of accounts receivable, slowing down the turnover of accounts payable.
In banking practice operating cycle viewed as:
Operating cycle = Inventory turnover + Accounts receivable turnover - Accounts payable turnover (in days)
The operating cycle characterizes total time, during which financial resources mortified in inventories and receivables. Since the company pays supplier bills with a time lag, the time during which funds are withdrawn from circulation, that is, the financial cycle, is reduced by the average turnaround time of accounts payable. The reduction in operating and financial cycles over time is seen as a positive trend. If a reduction in the operating cycle can be carried out by accelerating the production process and the turnover of accounts receivable, then the financial cycle can be shortened both due to the same factors and due to some uncritical slowdown in the turnover of accounts payable.
President of the Association for Effective Business, founder of the First School of Entrepreneurs business school
For effective management working capital of the enterprise, it is very important to track and be able to influence the three most important parameters that affect the need for financing:
Production cycle
The production cycle begins from the moment raw materials and materials (or goods in the case of a trading company) arrive from suppliers to the company and ends with the shipment of finished products (goods) to customers.It is clear that this term is not entirely suitable for trading companies, but, nevertheless, it is already considered generally accepted, therefore it is applied to them.
An analogy can be made here with the classification of expenses. There are production costs in the income statement. Despite its name, any company, including trading companies, can have such a group of expenses.
Obviously, the shorter the production cycle of an enterprise, the better. Any assets of the company require financing. Therefore, the longer the company's money is in inventory, the worse and vice versa.
The production cycle of the enterprise is influenced by:
Therefore, it is possible to reduce the production cycle by reducing the turnover period of inventory.
Financial cycle
The financial cycle starts from the moment of payment to the suppliers of materials (goods) and ends at the moment of receiving money from buyers for the shipped products (goods).Obviously, the longer the financial cycle, the greater the need for working capital. So you have to try different ways reduce the financial cycle.
The financial cycle of a company is influenced by:
It is necessary to pay attention to the fact that, unlike the production cycle, the financial cycle can be negative. An enterprise cannot ship finished products (or goods) until it produces (or purchases goods). Therefore, the shipment of finished products (goods) cannot be earlier than the purchase of raw materials and materials (or goods).
As for the movement of money, it can occur at any time. If a company pays to suppliers later than it receives money from customers, then the financial cycle turns out to be negative.
Operating cycle
The operating cycle is the period of time during which the current (circulating) assets of the company make a full turnover.The company's current assets include:
Obviously, the operating cycle cannot be less than the production cycle. In most cases, it exceeds it.
It is also clear that the operating cycle, like the production cycle, must strive to be reduced, since the faster current assets turn around, the better for the company.
Interrelation of production, financial and operational cycles
All these three cycles are interconnected (see. Rice. 1). In fact, this figure shows only one of the possible relationships.Rice. 1. The relationship of the production, financial and operational cycle
Not all companies receive material resources from suppliers without prepayment and ship their products without receiving prepayment from customers.
All possible options for the relationship between operational, production and financial cycles are presented in table 1.
Table 1. Possible options for the relationship between the operating, production and financial cycles of the company
The eighth option is the best for the company in terms of the efficiency of using working capital. Indeed, in this case, the enterprise first receives an advance payment from customers, then receives material resources from suppliers, then ships the products and only after that pays money to suppliers.
The worst option is the seventh, since the company first makes an advance payment to suppliers, then material resources are obtained, after that it ships the finished product and only then receives money from buyers.
Basic principles of increasing the efficiency of the used working capital
These principles follow from a quite obvious logic associated with the very concepts of operational, production and financial cycles.The basic principle of effective use of working capital- reduce the operating cycle of the company by:
In turn, it is necessary to strive to reduce the production cycle by:
And the reduction of the financial cycle should occur due to:
As for the production cycle, perhaps only one of its components can resist any targeted influence. We are, of course, talking about the period of work in progress, that is, the timing of production.
Sometimes this parameter can be reduced only by violating the production technology. Of course, it is better not to do this, because as a result, you can get low-quality products, which, ultimately, will affect the financial and economic condition of the company.
Although, in some cases, the optimization of production processes allows you to reduce the production time of products without disrupting the production technology. If all the reserves for increasing the efficiency of work in this direction have already been opened, then it is possible to reduce the production time only through the use of more modern equipment (and even then not always).
Purchasing new equipment can lead to significant investment costs. That is, due to such a solution, the company can reduce the need for working capital, but increase in investment.
Moreover, investment costs can be significantly greater than the savings that the company will receive by reducing the need for working capital. In some cases, the company will have to work for more than one year before the cumulative effect of savings on working capital will redraw investment costs.
Regarding the other two components of the production cycle, it can be argued that there is usually more room for maneuvers.
The period of turnover of stocks of raw materials and supplies largely depends on the company's policy in the field of supply of basic material resources. In addition, this can be influenced by suppliers, in particular by how quickly they can deliver their products.
After all, a company can keep large stocks of materials in a warehouse precisely because suppliers cannot promptly provide the company with the necessary resources. In some cases, it is possible to find other suppliers with whom it is more profitable for the company to work on this parameter.
In fact, of course, the choice of suppliers should be made on the basis of a comprehensive analysis, including an assessment of other important parameters, in particular, the timing of payment.
The company can also influence the turnover period of finished products (or goods) by improving the quality of sales planning, as well as the effectiveness of the implementation of the sales process itself.
Large stocks of finished goods (goods) can be the result of poor quality of the sales planning process. In this case, the company insures itself and keeps significant stocks in the warehouse.
Improving the efficiency of the sales process can also have a positive effect on reducing the turnover period of finished products. The faster a company can sell its products, the shorter its turnover period.
In terms of shortening the financial cycle of the company, the main efforts should be directed to the maximum possible shortening of the period of turnover of accounts receivable and an increase in the period of turnover of accounts payable. Simply put, you need to strive to ensure that money from customers arrives as early as possible, and payments to suppliers are made as late as possible.
It may be necessary to make some concessions to customers to reduce the turnover of accounts receivable. For example, a company may provide discounts to its customers for faster payment terms.
Conversely, in order to increase the turnover of accounts payable, it may be necessary to purchase resources from suppliers at less than favorable prices, but with a deferred payment.
So, in order to improve the efficiency of working capital management, an enterprise needs to closely monitor its operational, production and financial cycles. You need to learn to find opportunities to reduce all these cycles.
Note: the topic of this article is discussed in more detail at the workshop
- Solovieva Polina Andreevna, student
- Saint Petersburg State University of Economics
- DURATION
- OPERATING CYCLE
- PRODUCTION CYCLE
- FINANCIAL CYCLE
- WORKING EQUIPMENT
Any business goes through an operating cycle that includes two more important components: the inventory cycle and the money cycle. The most important indicator of effective regulation of working capital is the duration of these cycles.
- Improvement of the conditions for stimulating the environmental activities of the enterprise
- Assessment of the financial condition of the company and ways to prevent insolvency
- Approaches to the optimal choice of the path of professional development
Regulation of the use of working capital of the enterprise is associated with certain characteristic features the formation of its operating cycle, which in turn includes two other cycles: production and financial.
The duration of the cycles described above is the most important indicator efficiency of current assets management.
Operating cycle- the time stage from the purchase of raw materials / materials to covering the bill for finished products.
Production cycle- the time stage from the purchase of raw materials / materials to the acceptance of finished products that were produced from these raw materials / materials.
Financial cycle, which is also called the cycle of turnover of funds - the time stage from the payment of funds for raw materials / materials, which in turn is called the repayment of accounts payable, until the receipt of funds for sold products(repayment of receivables).
The duration of the operating cycle shows the turnover of the company's working capital, and shows the number of days for the exchange of funds for raw materials / materials. This indicator is considered one of the main indicators of the effectiveness of regulation of working capital.
To calculate this indicator, you need to summarize the period of turnover of receivables, the period of turnover of stocks and costs, the turnover ratio of accounts receivable and the turnover ratio of stocks and costs.
Due to the increase in the duration of the operating cycle, there is an increase in the need for working capital, and a decrease, on the contrary, is a positive indicator, because as a result, this need decreases.
This need can occur due to the following factors:
- Reduced production time
- Acceleration of accounts receivable turnover
- Slowdown of accounts payable turnover
The calculation of the duration of the production cycle of the enterprise helps to estimate the time spent on the production of goods.
To calculate this indicator, it is necessary to summarize the duration of the production cycle, the duration of technological processing, the duration of technological maintenance and the duration of breaks due to the operating hours of the enterprise.
The calculation of the duration of the cycle of money turnover characterizes the number of days between accounts payable and receivable.
To calculate the duration of this cycle, you need to summarize the duration of the financial cycle, the duration of the inventory turnover, the duration of the turnover, accounts receivable and the duration of the turnover of accounts payable.
Basic principles of increasing the efficiency of the used working capital
In order to improve the efficiency of current assets, you need to ensure that the operating cycle of the company is shortened by reducing the production cycle and reducing the financial cycle.
The production cycle of the enterprise is reduced:
1. Due to the decline in the period of turnover of stocks of raw materials and supplies.
Otherwise, either the depletion of warehouse stocks occurs, which in turn leads to interruptions in this cycle, or, on the contrary, there is an accumulation of excess stocks, the efficiency of warehouse management decreases, and unusable materials accumulate in the warehouse. After all, a company can keep large stocks of materials in a warehouse precisely because suppliers cannot promptly provide the company with the necessary resources.
Also, this period largely depends on the company's policy in the field of supplying basic material resources.
2. Due to a decrease in the turnover period of work in progress
This is one of the least targeted parameters, because it can be reduced mainly by violating technological process production of products, and this can affect the quality and the financial component of the company.
Sometimes, in order to reduce this figure, a company can purchase new modern equipment, which, of course, will not do without consequences.
This will entail a large loss of company funds. That is, in order to reduce the need for circulating assets, the company will have to increase its financial assets.
It is important to note that investment costs can be significantly greater than the savings that the company will receive by reducing the need for working assets. In some cases, the company will have to work for more than one year before the cumulative effect of savings on current assets will redraw investment costs.
3. Due to a decrease in the turnover period of finished products / goods.
The company can influence this parameter by improving the quality of sales planning, as well as the efficiency of the implementation of the sales process itself.
Large stocks of finished goods / goods can be the result of poor quality of the sales planning process. In this case, the company insures itself and keeps significant stocks in the warehouse.
Improving the efficiency of the sales process can also have a positive effect on reducing the turnover period of finished products. The faster a company can sell its products, the shorter its turnover period.
The financial cycle of the company should take place at the expense of:
- reduction of the period of turnover of receivables;
- increase in the period of accounts payable.
It is important to resolve the issue not only of reducing accounts receivable, but also balancing it with accounts payable.
It is possible that in order to reduce the turnover of accounts receivable, the company will be forced to make concessions to customers, and in order to increase the turnover of accounts payable, it may become necessary to purchase resources from suppliers at less favorable prices, but with a deferred payment.
So, in order to improve the efficiency of working capital management, an enterprise needs to closely monitor its operational, production and financial cycles. You need to learn to find opportunities to reduce all these cycles.
Figure 1. Relationship of cycles
Bibliography
- Blagikh I.A. Management of the production cycle of the enterprise // Problems modern economy... - 2010 .-- S. 97-100.
- Bocharov V.V., Moldovan A.A., Rumyantseva T.V., Skorokhod A.Yu., Tereladze D.I., Fedorova S.V., Shvedova N.Yu., Yuriev S.V., Chernenko V A.A. Fedorov K.I. Financial Management // Textbook and workshop for academic bachelor's degree, St. Petersburg, 2016.
- Gerasimenko A. Financial management... A course for managers and beginners. / A. Gerasimenko. - M .: Alpina Publisher, 2017 .-- 482 p.
- Kandrashina, E.A. Financial management: Textbook / E.A. Kandrashin. - M .: Dashkov and K, 2015 .-- 220 p.
- Naydenova, R.I. Financial management: textbook / R.I. Naydenova, A.F. Vinokhodova. - Moscow: Knorus, 2009 .-- 208 p.
- Financial management of enterprises (organizations): tutorial/ IN AND. Berezhnoy [and others] - Moscow: Finance and statistics; INFRA-M, 2011 .-- 336 p.
With the help of the operational and financial cycle, you can manage the profitability and liquidity of the company, which is always relevant for finance directors... We will tell you how, by shortening the operating cycle, you can increase your profit. And how the shortening of the financial cycle affects the liquidity of the business.
In a difficult time for the economy, the most pressing challenge for many CFOs has been to ensure the growth of the company's profits. The second most important issue is the maintenance of business liquidity. The well-known method of financial optimization - cost reduction - has long been implemented and managers are looking for other effective, but not so obvious methods of increasing business profitability. In this article, we will consider one of them - managing the company's profit and liquidity using operational and financial cycles.
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What is the operating cycle
The operating cycle is the broadest concept among the cycles performed by the current assets of the enterprise.
The operating cycle is the number of days for which the current assets of the enterprise make a full turnover.
Recall that the current assets of the enterprise are divided into two groups:
- Inventory.
- Cash and cash equivalents, and receivables .
Therefore, the operating cycle of an enterprise consists of two cycles - production (inventory turnover) and financial (cash flow).
Interrelation of operational, production and financial cycles
V general case the relationship of the operational, production and financial cycle can be visualized in the form of a diagram (see Figure 1).
Picture 1... Interrelation of operational, production and financial cycles
Note that the figure shows only one of the options for the relationship between enterprise cycles.
When the company uses different policies of relations with counterparties, other schemes will take place (see also about counterparty verification ). Let's give the most common examples in Figure 2.
Picture 2... Other options for linking operational, production and financial cycles
As you can see from the examples, there are many options for the relationship.
Operational cycle: calculation formula
where To is the operating cycle,
Tr - production cycle,
Tdz - the cycle of accounts receivable turnover.
The turnover period of receivables can be calculated using the formula:
where ∑ДЗ - the average amount of accounts receivable for the year,
∑revenue - total revenue for the year.
Cycle Time: Formula
To estimate the time of one turnover of raw materials and materials, you need to add the periods of turnover of receivables and stocks. The formula for the duration of the operating cycle looks like this:
where T оц - the duration of the operating cycle (in days),
T odz - the period of turnover of receivables (in days),
T oz - the period of turnover of stocks and costs,
To oz - the coefficient of inventory turnover and costs.
In order to determine the operating cycle, you need to calculate the production cycle.
Production cycle
The production cycle is the period that is required for the inventory of an enterprise to complete a full turnover. In other words, for manufacturing and trading companies, this is the number of days from the moment raw materials arrive at the warehouse until the finished product is shipped to the buyer. For companies operating in the service sector, this is the duration of the provision of one service.
It follows from the definition that the production cycle can be divided into phases:
- The cycle of raw materials and supplies.
- Work in progress cycle.
- The cycle of turnover of finished products.
Production cycle calculation
There is no universal formula for calculating the duration of the production cycle, so we will calculate the duration of each component of the cycle. All figures for the calculation can be taken from the regulated financial statements of the company for the year (or for any other period).
To calculate the turnover period of raw materials and materials, we apply the formula:
where Tob.s - the period of turnover of raw materials and materials, in days,
∑Loss of raw materials and materials - the average balance of raw materials and materials in the warehouse for the year,
∑ costs of raw materials and materials - total costs of raw materials and materials, per year.
The formula for calculating the turnover period of work in progress:
where Tob.nzp is the period of work in progress, in days,
∑NZP - the average amount of work in progress for the year,
∑ cost of products sold - total cost price products sold during the year.
The turnover period of finished products is calculated by the formula:
where Tob.gp is the period of turnover of finished products, in days,
∑ГП - the average value of the balance of ГП in the warehouse for the year,
Directly the production cycle itself is considered as the sum of three previously calculated periods. The formula for the duration of the production cycle looks like this:
The production cycle is measured in days, months, minutes, hours, etc.
Shortening the operating cycle and generating additional profits
The length of the operating cycle directly affects the amount of profit a company generates for the year. The shorter the operating cycle, the more turnovers will be made by current assets per year, and, accordingly, the more profit the company will receive per unit of invested funds. Therefore, we will consider ways to reduce the operating cycle, dividing them into groups:
1 group. Shortening the turnover period for raw materials and supplies
This includes the following methods:
- implementation of procurement policies in the organization, unification of procurement procedures, identification of key suppliers and maximum centralization of procurement processes. The result of the implementation of the method will be a reduction in downtime due to disorganization, the period of searching for a supplier and negotiations. Additional bonuses may be faster transportation of raw materials to the place of production and an agreement on reduced purchase prices;
- implementation of warehouse management policies, XYZ analysis, determination of minimum lots for groups of raw materials and materials. The positive effect will be expressed in the leveling of downtime due to lack of raw materials and materials;
- automation of inventory management and logistics. As in any other line of business, automation will give an effect in the form of better manageability, increasing labor productivity , and as a consequence, a reduction in the turnover of raw materials and materials.
Group 2. Reduction of the turnover period of work in progress
The methods of this group are the most capital-intensive and labor-intensive of all of the above, but the return on their implementation is great:
- modernization of machine tools and production equipment, purchase of new robotic lines. Any large capital investment should first be analyzed for increasing the capital productivity of production (see also what the capital productivity shows), but the experience of many companies shows that the improvement of production technologies gives a greater effect in the form of profit from reducing the operating cycle than capital investments for the purchase of equipment;
- improvement of manufacturability and unification of manufactured products. No less expensive, but no less effective method. Downtime for reconfiguring equipment is often more expensive for the enterprise than investments in R&D;
- increasing labor efficiency. A rich set of measures to raise labor productivity is described in specialized literature, including: switching to a shift schedule, photographing a working day, labor assessment based on KPIs, maximum automation and robotization of production procedures;
- competent management organization production processes, increasing the parallelism of processes, determining optimal size parties and so on.
Group 3. Reduced turnover period for finished products
For the third group, all the methods listed for the first group are effective, plus:
- implementation of policies for working with customers, synchronization of production with the requests of key customers (if possible). The effect of the introduction of the method will be the rational production of batches of goods for the needs of customers and avoidance of stagnation of finished products;
- permanent analysis of the market, dynamics of demand, seasonality of demand, competition in the market. If the sales market of the enterprise is a retail one, or it enters new markets for itself and has not yet acquired regular customers, this method becomes the first in importance of the whole complex of measures;
- reduction of the time required to generate reporting documentation;
- setting up your own logistics network, or choosing an optimal logistics company - a partner and / or agreeing on the minimum delivery time for finished products to customers, delay penalties.
What is the financial cycle
If the duration of the production cycle determines the amount of profit generated by the company, then the duration of the financial cycle directly affects the availability of free cash in the company.
The financial cycle is the period for which funds are withdrawn from circulation to ensure operating activities. In other words, this is the number of days from payment to the supplier for raw materials and materials until the receipt of funds from the customer for the finished product.
The financial cycle is calculated using the formula:
where T f is the financial cycle of the enterprise,
To - operating cycle,
Tкз - period of turnover of accounts payable.
Turnover period accounts payable in turn is calculated as:
Where ∑KZ is the average amount of accounts payable for the year,
∑ cost of products sold - the total cost of products sold per year.
Duration of the financial cycle
The duration of the financial cycle of the enterprise is determined as the difference between the period of circulation of stocks and receivables and the period of circulation of accounts payable. The formula for the duration of the financial cycle looks like this:
where T s - the period of the enterprise inventory turnover,
T dz - the period of turnover of receivables,
T kz - the period of turnover of accounts payable,
К odz - accounts receivable turnover ratio,
K oz - inventory turnover ratio,
K okz - accounts payable turnover ratio.
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