One aspect that should be well known to all entrepreneurs when starting is to understand how business works. It may sound like a truism, but for a business to function correctly, the proper performance of different operating cycles is required. All activities are necessary, and depending on the business, some will be more so than others. In this post, we highlight the operating cycles of a business, which will allow you to understand better how a business works.
You can group the necessary activities by affinity within what is called business operating cycles. The organization of activities by cycles has more to do with the processes (which are transversal) than with the functions of an organizational chart.
How Business Works
You can understand the way a business works by grouping all activities into six operating cycles. These include the following:
- Income cycle
- Production or transformation cycle
- Cycle of expenses
- Treasury cycle
- A cycle of financial information or accounting
- A cycle of returns or payroll
The following sections below identify the cycles and explain the interactions between them. Here is an overview of what each cycle comprises to help understand how a business operates:
This stands as the first stage of How business work. It includes the following:
- Promotional or marketing activities
- The receipt and registration of orders
- Coordination for delivery
- The recording of transactions for subsequent follow-up
- The receipt of confirmations that the products have you received per the customer.
- It also includes the issuance and delivery of the corresponding invoice and the proof of its acceptance.
This cycle must feed the accounting and treasury cycles the information of all the sales made.
Finally, the clients’ pending payment documents must also be saved as part of this cycle. Based on this information, issue follow-up reports, such as classifying debts according to their age.
This cycle includes activities to transform raw materials acquired from suppliers into finished products.
In the case of service companies, this cycle includes activities to provide services. These companies do not have a production plant but generally have operations where the people who offer the services work.
The issue of services may not be clear, and for this, we present the example of a laundry. This business does not make new products but carries out a transformation of the garments brought by customers.
This includes making them clean. You can say something similar to a beauty salon or a medical office.
Regardless of how complex the transformation activities of a company are, one of the following activities will always be part of this cycle:
- Prepare a production plan based on the sales estimates made in the income cycle.
- Carry out engineering work to develop or modify product designs.
- Prepare the machines and raw materials necessary for production.
- Carry out the elaboration or manufacture of the products per the production plans and specifications.
- Carry out quality control reviews to prevent defective products from reaching the market or services are not provided per the objectives.
- Transportation of the products to the final destination warehouses, be these within the plant or remote locations, confirm receipt.
Cycle of expenses
It is also often called the purchasing cycle and includes all activities related to acquiring the goods and services required for the operation. It consists of the following:
- The receipt
- of the purchase needs of all areas of the company
- The selection of the appropriate suppliers for each demand
- The issuance of purchase orders
- The receipt of purchases
- The confirmation that the delivery is per what was requested
- The record of transactions for subsequent monitoring.
- The expenditures cycle must feed the accounting and treasury cycles with the information of all the purchases made.
Finally, as in the income cycle, you must save the information on the payment obligations to the suppliers.
Read More: How to Start a Commercial Fishing Business.
The treasury cycle includes all the activities necessary to administrate the funds.
On the one hand, this means that you must have all the funding needs for the operation registered and make sure that they are available with the required opportunity and at the lowest cost. On the other hand, you must ensure that you use any surplus funds or invest them in the most advantageous way for the company.
For a control reason), the money collection functions related to the income cycle and the disbursement functions are under the scope of the treasury cycle. This will reduce the risk of some types of fraud.
Financial Information Cycle (accounting)
The financial information cycle includes the activities related to the compilation and analysis of the supporting documents of all the transactions that have an economic impact on the business. This also includes their correct registration in the corresponding accounts, and in the accounting.
Accounting is a log that records all events that affect the financial situation of the business. However, it should not be limited to registering events that represent the outflow or inflow of money. For example, depreciation does not represent a movement of money, but it does mean an expense that affects the income statement.
The accounting cycle must ensure that it gets the supporting documents corresponding to all the economic transactions carried out to meet its objectives.
On the other hand, the accounting cycle includes periodic reports such as the trial balance. It also entails the financial statements, such as the income statement, the general balance sheet, and the cash flow.
This cycle also corresponds to analyzing and interpreting the financial statements before sending them to the firm’s management.
A cycle of returns (payroll)
It encompasses all the activities necessary to perform the workers’ compensation calculation and ensure everyone receives their pay quickly and seamlessly.
All income and discount concepts are kept for each person and all transactions, such as loans, taxes withheld, or payments previously made.
Finally, the following activities related to personnel are part of the payroll cycle:
- Selection and hiring of new employees.
- Training of people so that they can adequately perform the positions assigned to them.
- Direct and execute the staff performance evaluation process.
- Lead the disincorporation of people, either voluntarily or by decision of the company.
Characteristics of a Business
Before learning how businesses work, it’s best to learn about the characteristics of a working business; come along!
Business is profitable
Every working business owner understands that passion and quality are necessary elements, but they are not enough to generate economic benefits.
For this, you need basic business knowledge, which means that you must analyze your products and services, their price, and the cost structure of your business.
It would help if you also studied the profitability of each of your products and services, have a medium-long-term vision, see market trends, etc. That is to say, your numbers speak, and you need to learn to listen and understand them.
G Suite has a marginally faster percentage – point rate of growth than Office 365, with a client growth rate of over 37% vs 36% for Office 365. When it comes to engaged active visitors, G Suite has grown by over 50 percent year over year, whereas Office 365 has grown by over 38 percent.
With a whooping 273 percent year-over-year increase, Snowflake is at the head of the rankings.
They care about being efficient
The owners of working businesses usually review the entire internal organization to use the available resources optimally. This implies organizing your business based on defined and transparent internal processes.
Only in this way will you get a global vision of each process that allows you to detect points of inefficiency to make correct decisions and establish priorities at all times.
From here, you can delegate the tasks where you do not add value directly, either in technologies or in people.
Sustainable and scalable
A business that works does not have a short-term vision but, in addition to seeking income as quickly as possible, they look to the future. This entails the medium and long term to prepare for growth.
Furthermore, there are different ways and systems to scale your business. You can, for example, perfectly scale your business offering services, only optimizing your internal processes. The ideal would be to review where the essence of your business is and where you add value.
Businesses are led with an Entrepreneurial Mindset
We understand the attitudes that allow you to develop specific skills to materialize your business idea and create economic opportunities by business mentality.
The entrepreneurial mindset will allow you to:
- Cope with obstacles and difficulties.
- Break limiting beliefs and personal blocks.
- Overcome the fear of change or leaving your comfort zone.
- Fuel your creativity, both at the beginning and to keep you going.
- Have a clear and focused vision of your mission and your goals.
- Cultivate discipline, perseverance, and patience.
What Results do you get from a Business that Works?
You can get the following output from a business that works:
- It is a stable process and, above all, predictable billing, which allows you to enjoy your business differently and live more serenely and calmly.
- A significant amount of time, freedom to dedicate it to whatever life asks of you at all times: family, leisure, inspiration, creativity.
- An intelligent catalogue of services. Currently, over 10% of customers deploy a substantial 200 apps or more. This year, nearly 78% of Okta’s Office 365 customers have adopted at least one best-of-breed app too and 31% deploy Slack, in addition to Office 365.
- Products connected that achieve recurring sales with less effort. Customers increasingly invest in multiple bundles, too: over 30% of Okta’s Office 365 customers now deploy G Suite today. The fastest growth within the people layer is coming from password managers, at 84% year-over-year growth.
- Strategic and coordinated actions plan so that you can face the day-to-day with efficiency and productivity.
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Frequently Asked Questions
What is the easiest business?
The easiest business is that which entails offering diverse services. Here, you offer your labour, skill, or expertise rather than physical goods.
What is a basic business?
A basic business refers to any enterprise which offers products or services to diverse customers.
What is a business, and how does a business work
A basic business refers to any firm offering products or services to diverse customers to make a profit. In addition to the points earlier highlighted, a business also works via the combination of the following:
What do businesses do for business?
Businesses usually strive to satisfy every client of the business.
What is an example of business to business?
A great example of business to business is manufacturing automobiles, as the process requires diverse inputs from other businesses.
What are the most successful small businesses?
The most successful small businesses include the following:
- Bookkeeping and accounting
- Marketing copywriter
- Social media management
- Graphic design
- Personal wellness
Finally, every company functions as a unified whole. Despite the problems of the Covid-19 epidemic, the proportion of enrolled enterprises is expected to rise in the second half of 2020, as per the ONS. There’s also indications that the f&b sectors, in general, witnessed a surge in new businesses – the amount of distillery alone increased by more than 29% in compared to the prior year.
And as earlier highlighted, you can organize the way a business works in 6 cycles of operation. On the other hand, this order does not necessarily correspond to the functional organizational chart of some firms.
For example, the activities of the accounting or treasury cycles are essentially equal to those considered in the functional areas of accounting and treasury.
However, the activities considered in the income or expense cycles are not related only to the sales or purchasing areas. For example, there is a relationship with warehouses, production, transportation, and even with the treasury in the expenditures process.
In this post, the idea is that there is a different way of seeing and organizing a business firm’s activities. Also, understanding how business works can help you manage your daily tasks effectively.
I am Lavinia by name and a financial expert with having a degree in finance from the University of Chicago. In my blog, I help people to educate by making wise choices regarding personal investment, basic banking, credit and debit card, business education, real estate, insurance, expenditures, etc.