Understanding Business Cycles and Financial Maturation

Understanding Business Cycles

Business cycles represent the periods in which a company recovers the capital invested in its operations. These cycles typically follow two distinct paths:

1. The Long Cycle (Economic Cycle)

The long cycle begins with the acquisition of resources and their immobilization in non-current assets, such as machinery. These assets depreciate over time as they are used. Recovery occurs over several years, with half of the investment typically recovered through depreciation.

2. The Short Cycle (Operating Cycle)

The short cycle begins with the immobilization of resources in raw materials and supplies. It continues through production and sales, ending with the collection of invoices and the recovery of cash. The Maturation Period (PM) is the time required for a company to recover the money invested in its production process.

Calculating Financial Maturation

The Economic PM covers the entire operating cycle, from the entry of raw materials into the warehouse to the collection of invoices. The formula is:

PMA = PMV + PMC + PMF

The Financial PM represents the number of days the company must fully fund its operations:

PMF = PMA + PMV + PMC - PMP

Trading Companies and Cycle Optimization

For a trading company engaged in the buying and selling of products without a production process, the cycle is simplified:

• Supply Subperiod: Time finished products remain in stock (WFP).
• Collection Subperiod (PMC)
• Payment Subperiod (PMP)

In this case, the PM = PMA + PMC - PMP. Companies should aim to shorten this cycle to increase resource efficiency and turnover.

Financial Maturation and Liquidity

The relationship between the PM and Financial Needs (FM) is critical. A shorter maturation period reduces the need for external financing. A negative PM does not necessarily imply a liquidity problem.

Determining Minimum FM

The Rotation Method helps determine the average financial balance of heritage masses:

(I) = Total flow of masses (i) × 365 / PM (i)

Financial Assets (FM) Formula:

FM = A + F + V + C + NC - P

Where: A = Assets, F = Production costs, V = Cost of sales, C = Annual sales, and P = Total purchases.