Businesses of all shapes and sizes are organized around three cycles, including yours. Today I’m going to be discussing the first of them: the operating cycle.
When you think about running your business, you’re almost always thinking about the operating cycle. A business’s operating cycle encompasses the day-to-day activities, including the things you make, buy and sell. The financial statement illustrates the operating cycle in a couple of places. The balance sheet places it first, as current assets and liabilities (also called short-term assets and liabilities). The statement of cash flows also places the operating cycle at the top. The income statement focuses primarily on revenues and expenses from the operating cycle.
What does “current” mean, anyway? Current assets and liabilities are things you hold for a year or less. That’s the length of the operating cycle. Pretty much everybody is organized around a year’s time, so this makes sense. It’s often not until the end of the year that you know if you’ve made a profit and, if so, how much you made.
Within that year’s time, other elements of your business are running on even shorter cycles. You make tax payments quarterly, pay rent monthly, and make payroll every two weeks. Inventory turnover and receivables especially have their own cycles. These revolve several times over the course of the year.
In an earlier post, I described how some of the profit from small businesses comes to the owner as cash flow. That cash flow springs forth out of this operating cycle.
To wrap up, the operating cycle is the easiest level to picture because it reflects what you do in your business every day.
In my upcoming blog posts, I will talk about two other cycles that work in tandem with the operating cycle and why they matter for your business.