Cyclical Nature of Business: What are the cycles in business?

Cyclical Nature of Business

Every business goes through different cycles.

First stage is growth; second stage is consolidation.

There are some cycles; they are explained below:

Financial Cycle

Financial cycle is also known as business cycles, economic cycle or trade cycle.

It shows the rises and falls in economic activity of GDP (gross domestic product) around its long-term growth trend.

Usually, these rises and falls involve shifts over time between periods of relatively rapid economic growth and periods of decline

Growth means expansions or booms but decline means contractions, stagnation or recessions.

Growth is done through planning and analysis; businesses can better recognise symptoms of growth and recession.

During economic growth, jobs, production and sales will show keen signs of growth; conversely, economic recessions indicate through rising unemployment, slow growth and stagnating prices.

Through experience, business owners and operators become naturally agreed to the peaks and flows of the economy.

But, when the livelihood of workers and family are at stake, it is too great a risk to place complete trust in gut instinct.

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Accounting Cycle

The accounting cycle is similar to the accounting process.

It involves a series of accounting tasks such as identifying business transactions, recording them in journal entries, posting them into the general ledger and finally using the information in the general ledger to prepare financial statements.

The length of an accounting cycle is dependent on nature of business.

An organization can select the start and finish date of its accounting cycle. An accounting cycle may be a calendar year or a financial (fiscal) year.

Financial institutions and joint stock companies prepare financial statement on a quarterly basis.

Operating Cycle

The operating cycle is similar to cash-conversion cycle.

The operating cycle is the time required for a company’s cash used into its operations then return to the company’s cash account.

Organizations do not randomly decide an operating cycle because it reflects how in reality business transactions progress from start to finish.

It is the length of time to convert its purchased inventory to sales revenue.

Generally, operating cycle includes the days of raw materials converted into cash such as raw materials → work in progress → finished goods → store in warehouse → sells to customers → cash collection from customers → cash paid to suppliers → profit earned from cycle.

An operating cycle may repeat itself multiple times within the same accounting cycle.

It is depending on how soon an organization is able to convert inventory to accounts receivable to cash and how long it can hold its cash before paying for accounts payable and other accrued expenses.

Keep in mind

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