The financial cycle is an indicator of the efficiency of the enterprise

The financial cycle is the period that is concluded between the date of repayment of accounts payable (payment by buyers of received materials and raw materials from suppliers) and the date of repayment of receivables (receipt of funds from buyers for the products they received). The second name of this concept is the cycle of money turnover.

The financial cycle has a duration determined by the following formula:

PFC = POP + PODZ - POCC,

Where POPZ is the period of circulation of production stocks;

PODZ - an indicator of the period of circulation of accounts receivable ;

KPOZ is the indicator of the period of circulation of accounts payable.

Proceeding from what has been said, the duration of the cycle of money turnover is characterized by the average duration associated with the outflow of funds in the implementation of the main production activity, and the inflow as a result of their production and financial activities.

In other words, the financial cycle is the time for which money is being diverted from the turnover. This indicator is necessary in determining the effectiveness of the economic activity of the subject.

At the disposal of the enterprise there is always a reserve, which it can use if necessary. It is a question of monetary resources represented by accounts payable. Indeed, the money invested in production can not be extracted simply from there to cover their short-term shortage. Therefore, there is no question of sales of production stocks at low prices. The situation is similar with receivables. To obtain additional funds, the business entity achieves certain changes in its relations with debtors.

The financial cycle of the enterprise shows an effective regulation of the same accounts payable. So, the moment of payment can be successfully managed, and in the event of a critical situation - to delay the repayment of such debt. In other words, it is payables that indirectly regulate the amount of current cash and should be taken into account when assessing the financial performance of the company.

When analyzing the activity of the subject, specialists note the interrelation of the operational and financial cycles, but they describe various aspects of the enterprise's functioning. Thus, with the help of the operational cycle , the characteristics of the production and technological aspects of the company's activities are given. It shows the time at which the financial resources are frozen in the form of stocks and receivables.

The financial cycle shows exactly the financial aspect of the activity. Due to the payment of bills, the company has some time lag - the time for which money resources are extracted from the turnover - less than the average turnover of accounts payable.

With the dynamic reduction of the operational and financial cycles by specialists, this fact is regarded as a positive trend. The decrease in the size of the operational cycle is carried out, mainly, by increasing the speed of the production process and accelerating the turnover of receivables. And the financial cycle can be reduced due to a certain decrease in the turnover of accounts payable.