The importance of a company's short cycle.

The short cycle or operating cycle.

Financing and installing fixed assets do not guarantee the operation of the company. To start operations, we will also need short-term financing to cover the purchase of raw materials, pay salaries, and cover general expenses (rent, utilities, water, etc.). When the product is sold to the customer, the selling price will be formed taking into account these operating expenses, so when collecting the selling price, we recover these costs. Based on this, we can define the short cycle as the process of exchanges and production that ensures the operation of the company's fixed assets without interruptions.

The amount of short-term assets to be used in the operating cycle in order for the fixed asset to function without interruptions is known as NWC, Net Working Capital.

Its components would be:• Cash• Raw material stocks• Work-in-progress stocks• Finished goods stocks• Accounts receivable

Average Maturity Period.

The time it takes for the monetary unit invested in the operating cycle to go through it and become liquid again is called the Average Period or Maturity Period of the company, MP.

The Daily Average Expense, DAE, demanded by the operating cycle will be given by: DAE = (rm + dl + oe) / 365

Where: rm= raw materials; dl= direct labor, oe= overhead expenses

To ensure that the short cycle does not experience interruptions, we just have to immobilize in it as many DAEs as the duration of the operating cycle, MP; that is: Financial immobilization required by the operation of the short cycle = NWC = MP × DAE = Net working capital

Working Capital and Working Capital.

The minimum financial balance specifies the need for all fixed assets to be financed with fixed liabilities, as well as all current assets, by short-term liabilities. From a stricter point of view that goes beyond this minimum, we can say that for greater financial security, permanent liabilities must exceed fixed assets.

Working capital:

Corresponds to the volume of short-term assets financed with long-term liabilities.

Working capital or turnover fund:

It will be the volume of fixed liabilities that finance current assets or short-term.

The safety rule, therefore, establishes that these concepts of working capital and turnover fund must necessarily be positive.

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