Understanding Company Financial Cycles and Resources

Company Financial Cycles

Companies constantly carry out investments. A business begins with the input from one or more members of a sum of money with which to make different investments. The company acquires, on the one hand, elements of fixed assets: plant, machinery, etc. And, secondly, circulating elements: raw materials and other supplies. With these investments and hiring labor, the company begins its activity. Thanks to the production and marketing functions carried out, it manufactures and sells a product. When the company charges the amount of sales, it returns to money. This process is repeated continuously throughout the life of the company. This gives rise to two cycles: the long cycle and the short cycle.

The Long Cycle

The long cycle of the company begins with the collection of resources in money and its detention in fixed assets: buildings. All these items are worn over time from use, obsolescence, etc.

The Short Cycle

The short cycle is also called the exploitation cycle, business cycle, or money-merchandise-money cycle. This cycle starts with the immobilization of resources in the acquisition of raw materials and other supplies, continues with the production, marketing, and sale of the product, and ends with the payment of invoices to customers, involving the recovery of money invested in buying circulating assets. The average duration of the exploitation cycle is called the average maturity period.

Company Resources

Capital

This consists of the contributions of members and, moreover, by successive capital increases that may occur. The capital contributions can come from individuals and companies.

Reserves

They come from the retained earnings by the company and are part of its internal cash flow. Reserves are the benefits that remain in the company. With reserves, new investments can be made, and therefore, pro-growth, which is why stocks are also called self-financing of enrichment. The benefits are obtained from the result, which is achieved following the development of their business. Reserves can be of different types:

• Legal
• Statutory
• Voluntary

Unlike reserves, there is other funding that is not growth for the company but is self-financing of maintenance to sustain the productive capacity of the company. The measure that comes from a part of the result that leaves the company, this is: the funding of maintenance, is formed by depreciation and amortization.