Businesses of all types are organized around three fundamental cycles. In my last post, I talked about the operating cycle. Now I want to move on to the next level: the asset cycle.
The largest part of your balance sheet is dedicated to long-term assets and liabilities. The assets include the property, vehicles and equipment you own. On the other side of the balance sheet, you’ll find the debt you took on in order to acquire these assets. Unlike the operating cycle, these assets have a lifespan of many years. Depending on the asset, the lifespan could be two years, 15 years, 30 years and sometimes more.
Acquiring, managing, maintaining, and ultimately selling these assets will consume a large amount of your time as the business manager. As you start working with these assets, you come to understand that they each have their own cycle. The Statement of Cash Flows in your financial statements calls this “Investing Activities.” I think calling it the asset cycle better captures what it’s all about.
In the operating cycle, you carry out activities that generate your sales and profits. In the assets cycle, you are building up your company’s capacity to carry out those operations. If you are a manufacturer, it’s all the equipment you use, but not the raw materials or the finished products. You buy more or newer equipment to produce more products to sell.
If you’re in the rental property business, you acquire more properties so you can lease them out. Again, this is what runs and grows your cash flow. When you manage the assets cycle properly, you are strategically thinking about how you can improve and grow your business. You will think strategically when it’s time to reinvest in those assets or sell them and perhaps acquire a new asset.
The interplay between the assets cycle and operating cycle is at the heart of your business. However, there is one more cycle to consider to help maximize your business returns, and I’ll talk about that next.
