Business Investment and Funding Cycles

Investment Definition

To perform activities, a company needs a set of elements or factors of production. Thanks to the savings of different economic agents, companies can obtain the resources they need to carry out their investments and thus become eligible for benefits.

According to Pierre Massé: "Investment is the act whereby there is a change of instant gratification and a certain resignation to that for the hope that is acquired, of which the asset acquired is the support." Investment enables business growth.

Selecting Funding Sources

Several factors influence the selection of funding sources:

• The Type of Investment

  For financing current assets, funding sources may be short-term. However, if the asset is expected to remain with the company for longer than one year, the funding source must also have a repayment period longer than one year.

• The Desired Level of Indebtedness

  If the company wishes to reduce its level of indebtedness, it must seek internal (own) funding sources.

• The Cost of Funding

  Long-term sources tend to have higher costs than short-term sources. The company will select the funding source with the lowest cost.

Company Cycles

A. The Long Cycle

The company's long cycle begins with the collection of monetary resources and their allocation to fixed assets: buildings, plant, and machinery. All these items depreciate over time. When assets are fully depreciated, the sinking fund is used to renovate them, which leads to another cycle. The cycle time for each asset is different. The company recovers the money tied up in investments through depreciation.

The amount of depreciation is part of the product's cost. Recovery occurs when the company collects sales revenue.

B. The Short Cycle

Also called the operating cycle or the money-commodity-money business cycle. This cycle starts with the allocation of resources for the acquisition of raw materials and other supplies, continues with production, marketing, and sale of the product, and ends with the collection of payments from customers, involving the recovery of money invested in acquiring current assets.

The average length of the operating cycle is called the average period of maturation. It is called the short cycle because it occurs multiple times within a longer cycle and is typically shorter than a year.