Author: Virolic

Understanding of concept and application of compliance in companies is the basic necessity to be able to manage successfully in business. After all, being a complying company enhances credibility and transparencies in the market.
You have probably already seen news regarding companies facing punishment for corruption, violation of environmental laws and a hostile work environment to employees that significantly affected their mental status and working capabilities.

These businesses get their lid opened by such frauds, but their image and reputation are also shaken in front of the customers, the general public, and other stakeholders.

Therefore, the concept of compliance is strongly linked to ethics, helping companies to implement good internal practices and to commit more strongly to the rules of their sector.

In other words, the process is not just about creating a set of bureaucratic rules and putting them in a manual, but rather about creating a culture of compliance based on the understanding and importance of standards and teamwork.

Does your business need reinforcement in this area? Continue reading this article and understand what compliance is in companies, its importance, the types that exist, how it works, its advantages and how to apply it.

Happy reading!

What is compliance in companies?

This set of measures to preserve the company’s integrity with the public sector and its relationships with other businesses, partners, suppliers and employees are implemented and monitored by the Compliance area.

In this way, compliance rules are present in all sectors of the company, ensuring that it operates within the standards required by its market niche, in addition to complying with general government rules regarding financial, environmental, labor and other aspects.

Function

Compliance programs enable companies to operate in accordance with industry best practices and business needs. They are also a way to mitigate risks while maintaining ethics and compliance with existing laws and regulations.

By conducting the process appropriately, companies avoid external sanctions, public exposure and internal crises that harm business growth.

This result, of course, is directly related to the team’s engagement with compliance guidelines. To achieve this, it is essential to have strategies to train and educate employees so that they behave as requested.

How important is compliance in companies?

Compliance in companies is important because it contributes to establishing an organizational culture focused on compliance by reinforcing the communication of standards that regulate activities and training to disseminate knowledge.

The culture of compliance in business is still valuable in an educational sense because it establishes corporate values, which will be demanded from the entire team, from the president to the operational team.

When a company is able to remain compliant with the rules, closely monitoring the team’s conduct, it is free from public exposure, fines, lawsuits and sanctions that could harm market performance.

Compliance does not prevent erroneous processes from happening nor does it put an end to them definitively, but efficient monitoring allows you to identify them and act before the problem gets bigger.

Types and examples of compliance in companies

To develop a compliance program, you have to know the different types of compliance and what your company must comply with. In addition to those below, you must inform the area manager of other specific requirements in his market, ok?

Discover the main types and understand the function of each one:

1. Tax compliance

Tax compliance ensures that the company complies with all tax obligations related to its operations. So it is essential to have good accounting advice to help with this task.

Errors in this area can result in fines that harm companies’ financial goals . When they are not complied with in bad faith to evade taxes, for example, the penalties under the law are even stricter.

Therefore, having good accounting ensures that the business complies with its municipal, state and federal obligations, avoiding unnecessary expenses.

2. Financial compliance

It is very destructive not only to a company’s image but also to the reputation of that organization while doing its business in the market. One of the examples of such destructive behaviors includes fraud, bribery, and embezzlement.

Financial compliance comes into the picture to ensure that all business transactions carried out are done legally along with proper records, such as invoices, direct deposits into the company’s account, etc.

Annual reports are availed that include the Balance Sheet, Income Statement (DRE), Statement of Accumulated Profits or Losses (DLPA) and Statement of Sources and Applications of Funds (DOAR) and many more. Laws decree annual reports accounting for all financial transactions.

3. Labor compliance

Labor compliance is still a bottleneck for many companies that neglect aspects related to hiring and compliance with working hours.

The recruitment and registration process, as well as labor rights, are established in the Consolidation of Labor Laws, the famous CLT. Therefore, it is the duty of companies to ensure that their employees have their rights respected.

This work is the responsibility of the Human Resources department, which takes care of hiring, but also welcomes each new member and monitors aspects such as safety, well-being, quality of the work environment, access to the best tools, etc.

Covering all requirements improves productivity and talent retention, as well as attracting qualified professionals.

4. Compliance for data security

Remember the General Data Protection Law (LGPD)? This legislation has been in force in the country since 2018, and has required adaptations in businesses to ensure that corporate data is kept confidential and shared with third parties only with authorization.

Data security compliance defines guidelines related to how companies handle, capture, analyze, store and dispose of data, whether from customers, marketing campaigns, among others.

Information security is one of the main points of this work to prevent leaks, which can compromise the business strategy and the privacy of the people involved.

5. Environmental compliance

Environmental compliance is a rising strategic objective, especially with the rise of ESG , a proposal whose objective is to integrate the environment, social and corporate governance issues to encourage the construction of more sustainable and responsible businesses.

Therefore, each company, depending on its area, needs to be aware of the guidelines that govern its activities, such as, for example, the management of waste .

In addition to complying with the rules, environmental compliance also helps to analyze how an operation can be more efficient and cause less impact . Energy security studies and the use of sustainable energy sources are some examples of exchanges.

How does compliance work in companies?

A compliance program works based on the alignment of the following points:

• Commitment of senior management
• Risk mapping and assessment
• Defining a clear code of conduct
• Creation and dissemination of a compliance culture
• Implementation of communication channels
• Organized documentation and accounting processes
• Investment in hiring and training
• Definition of disciplinary actions
• Damage management strategies
• Relationship strategies with business partners and competitors
• Monitoring and updating guidelines

The responsible sector, in partnership with the managers of each area, must strive to ensure that, through work, the company has more efficient governance and broad visibility of operations, adopting lawful growth strategies.

The proper functioning of the compliance program is essential for the company’s credibility, combating corrupt and illicit behavior and providing accurate and rapid solutions when administrative deviations occur.

What are the advantages of compliance in business?

Investing time and personnel to align ethics and compliance in companies has positive benefits for the image and reputation of the business. Check out these benefits:

Have a greater competitive advantage in the market

The more aligned and followed the compliance processes are, the more solid the company’s work will be, helping to maintain a high operational standard that will make it stand out in the market.

After all, credibility and integrity are valued requirements in the market and businesses that can offer them come out ahead of their competitors.

Better risk management

Every company is vulnerable to risks, whether in the execution of processes, in the conduct of employees or in compliance with regulatory guidelines.

With active compliance, potential risks are monitored, allowing identification and anticipation through the implementation of prevention strategies.

Building an ethical organizational culture

Organizational culture acts as a leveler of expectations within a company. Established values ​​indicate what the organization expects, and corrective measures make clear the consequences of those who act contrary to them.

When companies invest in training and conversations about compliance, understanding and, consequently, the adoption of recommended postures is improved, establishing the standard of integrity.

More sustainability

Sustainable development is an objective that is currently on the radar of companies. Compliance guidelines help achieve this goal by providing clear guidelines for managers to evaluate the available solution options and prioritize the most sustainable inputs.

Recognition of these efforts benefits several corporate aspects, such as operational efficiency, market credibility and increased investor interest.

How to apply compliance in a company?

Now that you know what compliance is in companies, its types and how it works, all that’s left is to understand how to apply this process in your company, right? Here are some tips to help you take the first steps in your business:

• Have a team responsible for the operation : compliance work is complex, so set up an internal team or hire a consultancy to carry it out.
• Create and document a company code of conduct : The document lists corporate guidelines and values ​​and defines policies and channels for reporting misconduct across all areas.
• Strengthen internal communication : disseminating compliance policies through training, lectures and department meetings is essential for adopting compliance principles.
• Conduct periodic internal audits : Audits are a form of risk prevention and allow you to discover errors and inappropriate behavior before the problem escalates.

Did you enjoy learning about compliance guidelines? Investing in implementing a compliance program contributes to the maturity of business management and also stimulates business growth. Invest in this change!

When you need to make a change or improvement in your company, what do you turn to: your sixth sense (the famous ‘ feeling’ ) or some planning method to guide the process?

If you are part of the “evidence-based decisions” team, in this article, you will learn everything about the PDCA cycle , a systematized method that helps to plan, execute, monitor and evaluate the actions implemented in business.

With a methodology guiding the process, there is the possibility of having to adjust the chosen actions, imagine modifying them without having any prediction of the impacts that this will cause.

So, continue reading the article and learn how to implement successful strategies, overcome challenges along the way and continue the process of continuous improvement of your company with the PDCA tool!

What is PDCA in a company?

The PDCA cycle (Plan, Do, Check, Act) is a methodology that helps solve corporate problems, with the aim of promoting the continuous improvement of business processes, assisting decision-making with accurate and reliable data and contributing to better predictability of results .

The method was created in the 1920s by the American physicist Walter A. Shewhart. In the 1950s, the statistician William E. Deming perfected the tool, popularizing it in the corporate world.

The difference is that the methodology can be applied to each process optimization cycle that the company goes through. Thus, the steps are repeated, but the context analyzed is always different, since it starts from previous improvements.

In this way, the method is a way to continue optimizing strategies to achieve the desired results, without losing what has already worked.

What are the 4 steps of the PDCA cycle?

The PDCA cycle is based on four main steps: Plan, Do, Check and Act. The names indicate what is done in each phase of the method, but we will detail each step below:

1. Plan

The first step of the PDCA cycle is to plan , that is, find opportunities for improvement and then make the plan that will lead to the changes.

And how do you know what needs to be improved? As a manager, you must pay attention to your sector to identify processes that are not working and causing problems.

This investigation results in a list of demands, so it is necessary to define which will be the priority at the moment. One way of thinking is to evaluate which process has the greatest impact on the workflow and which, if changed, would improve other steps.

Each optimization must have its own planning with a defined objective linked to the business goals. In short, at the end of this stage, you must complete the following steps:

• Define the problem
• Analyze the root cause
• Set a goal
• Decide on corrective actions

2. Do (do)

The second step of the PDCA method is Do. Here, it is time to put the planning into practice and execute corrective actions to test its efficiency.

Optimizations can occur in several areas, such as the operational line, logistics, maintenance management , training strategies, administrative practices, among others.

The action must be customized for each context, considering the need for improvement and other factors that influence the activity.

To take effective action, map out the process step by step, define those responsible for each part of the task, establish indicators to monitor results and assess the need to include new tools.

3. Check

The third stage of the PDCA cycle is verification (Check) . The main activity is to evaluate the results of the first post-change tests through performance indicators, based on the criteria defined in the planning.

The second check takes place after the implementation period has been completed. At this point, it is possible to identify errors in execution, failures and successful actions.

This way, at the end, you will have a list of what worked and what still needs to be optimized for the process to be fully efficient.

This is a crucial moment in the application of the methodology and requires a lot of attention. Some tips that can help are:

• Set deadlines for initial testing and the overall process
• Monitor quantitative metrics constantly
• Define a qualitative improvement parameter, if the process does not have a numerical reference

4. Act

Closing the PDCA cycle, we reach the action stage (Act) , that is, the defined solution based on the results achieved. At this point, the responsible team creates a new pattern and records the step by step.

The new instructions must be passed on to all employees involved in the activity to avoid errors in the new stage. If, in the future, the first optimization is no longer as efficient, a new PDCA can be carried out to adjust the process.

As mentioned above, the method is cyclical, so with each round of improvements/adjustments, the four steps need to be repeated. Often, due to overconfidence, teams make decisions without planning.

This decision harms the progress of continuous improvement because, by discarding the previous process, the errors overcome may be repeated. Therefore, always remember that the continuity of improvements depends on the correct application of the methodology.

Variations of the method

PDCA is a tool recognized for its efficiency in solving business problems. It is so successful that there are variations of the method, but all maintain the four-step scheme. We have separated three alternatives:

PDSA

PDSA only changes the penultimate step of the original cycle. Check is replaced by the Study step. This does not mean that it is completely eliminated, but in this variation of the method, the study is more in-depth, using historical data from the process .

The person responsible for this change was William Deming, who, when evaluating the original cycle, considered that the verification stage was very superficial and that it was necessary to investigate the changes achieved in greater detail.

PDCL

In PDCL, the changed step is the last one. Act gives way to Learn, so instead of standardizing the process, concluding the cycle, the team turns its attention to learning.

In this way, the work continues, directing efforts to deepen knowledge about the process, evaluating the chances of obtaining other improvements with a new planning and execution cycle.

PDCL can be useful in complex operations in highly competitive markets, where efficiency is a key aspect of the operation, in addition to keeping the business at the forefront of its market .

SDSA

The last variation is SDSA , and here two steps of the original cycle are changed: Plan becomes Standardize and Check becomes Study.

The goal of this cycle is standardization. The idea is to conduct continuous rounds of testing until the goal is achieved. Only when the ideal level of performance is achieved will the new process become standard and be implemented.

To obtain positive results with the SDSA cycle, it is recommended to perform the PDSA first (once or twice) to improve the main aspects and then apply the SDSA with more knowledge about the work context.

The goal is for this approach to consolidate improvements and prevent the recurrence of errors and mismatches.

How to do a PDCA cycle?

To carry out a PDCA cycle, it is essential to follow each of the main steps, or variations. As the process is systematized, the steps complement each other and aggregate information, allowing for accurate assessments.

The methodology can be repeated as many times as necessary and there is no limit. However, having a break between one cycle and another helps to observe the situation with more perspective and understand where the root cause of the error/misadjustment lies.

The responsible team sets the deadline for reapplying the method. This way, those involved can monitor the work and, most importantly, avoid skipping steps due to the rush to reactivate the process.

Remember that one step depends on the other? Therefore, an error or poorly performed assessment can directly impact the quality of the final PDCA analysis.

Errors in applying the tool

To obtain a good result, be careful and avoid the following mistakes when applying the cycle:

In-depth reviews

When a problem arises in a company, the most urgent need is to resolve it quickly. However, rushing can lead to a superficial analysis of the situation. Without finding the root cause, the solutions defined on impulse will not actually improve the situation.

To assist in the planning stage, use other management tools with a systemic approach, such as the 5 Whys and 5W2H , which focus on helping to define the root cause of problems.

Insufficient knowledge

The team responsible for conducting the PDCA cycle needs to have knowledge not only of the methodology, but also of the process being analyzed.

So, if the work will be in the operational sector, the team needs to include people with sufficient knowledge of the area and its processes for the proposals to be coherent.

Furthermore, improvement proposals need to consider the need for new training for the team that will carry them out so that employees can learn the new technique.

Confused assessment

Another PDCA error is to make a confusing assessment without clear criteria to support the conclusions. An incorrect assessment can lead to changes that will not be beneficial to the process, causing losses in productivity and deliveries.

Therefore, the indicators that will guide the analysis need to be well defined for the assessments to be accurate and reliable.

PDCA method example

As PDCA is widely applied in process improvement, we will use the increase in industrial productivity as the objective to be achieved to create a practical example.

In the planning stage, the team must evaluate which activities are carried out, determine the average production time, how many people work in the area evaluated, who the manager is, etc.

One of the problems identified is not having enough staff to cover the entire process quickly. So, in the execution stage, the first test is to include more people in the team for two weeks to try to reduce the average production time by 5%.

During verification, the team assesses whether, in the period analyzed, the indicator was reduced and what impact this had on the rest of the operational chain.

If the results are positive, new employees can take on the position permanently. If the desired result is not achieved, it is essential to listen to the team to understand what went wrong and gather new suggestions for improvement.

The example is simple, but it illustrates the collaborative work of applying PDCA well. It is not just the steps that are connected, the team leading the project and the team executing the tests must collaborate, contributing to broadening the vision of the framework studied.

Where can PDCA be used?

PDCA is a versatile method that can be used to guide various types of projects in different areas of a company. In the corporate world, the method is applied to the following activities:

• Business process optimization : reorganizes and improves workflows by including or deleting steps to optimize the process.
• Adapting sectors to compliance guidelines : helps to make changes so that a sector, for example, finance, meets compliance requirements, prioritizing transparency.
• Creation of new products or services : the PDCA method is very efficient in guiding the steps of including new items in the portfolio, prioritizing the high level of quality of the company’s solutions.
• Efficient standardization : the method guides the entire process of implementing new standards, highlighting errors and successes and allowing them to be improved to meet the defined requirements.

Building good partnerships in the market is essential for any company. After all, every business needs the support of third-party services or raw materials, both for good management and to keep the operational flow running.

Therefore, a well-made selection of suppliers keeps on the list of options only those who are truly qualified, reliable and capable of providing a good service.

With the digitalization of processes, the search for new providers gains an enabling component: the internet. This way, it is easier to find and filter references.

The report ‘ The Gartner Future of Sales 2025 ‘ by consultancy Gartner, highlights that, by 2025, 80% of sales communications between suppliers and B2B buyers will take place through digital channels.

And to conduct the process online, your business’s purchasing management team needs to be careful before closing a deal with a partner.

Continue reading the article to find out what key requirements a potential supplier needs to meet before being included in your company’s partner list.

What is the supplier selection procedure?

The supplier selection procedure is the process carried out by the purchasing management area of ​​companies to find, evaluate and hire new businesses as partners.

The objective is to put together a list of reliable brands on the market for the supply of products, raw materials or services to supply, or manage, different sectors.

The quality of a business’s supply chain depends on choosing good suppliers that contribute to the continuity of operations.

In addition to resulting in a list of reliable references, the selection process helps to:

• Reduce purchasing risks;
• Strengthen partnerships with trusted companies;
• Gain bargaining power ;
• Negotiate advantageous values ​​and terms and much more.

How to select suppliers?

To make a successful supplier selection, the process needs to be well organized internally. The goal is to follow the process step by step and analyze all the criteria before including a new partner as a possible purchase option.

If your company doesn’t have any methods yet, start with market research . Suppose you need a new packaging supplier. The first step is to search the internet for businesses in your area.

Next, search engines highlight businesses at the top of the page, helping to raise initial options for further research on websites and social networks.

The next step is to select those you will contact . The goal at this stage is to understand the supplier’s sales processes, whether they have well-defined, clear steps and whether the service is well-conducted.

Then, it is time to send an order proposal and analyze the price, delivery time, or the way the service is provided, and payment methods from the most qualified suppliers.

The team must evaluate everything from the way the budget is presented to the detail and clarity of all the details to close a purchase.

As with any purchase, negotiation is part of the process. So, evaluate the supplier’s negotiation flexibility, what conditions they offer for the first order, whether they offer any type of benefit for recurring purchases, among others.

Closing the supplier selection process does not mean ending up with just one company to serve the packaging category. Define three options , one main and two as a backup, so as not to depend on just one partner. This rule applies to all categories.

What are the criteria for selecting suppliers?

Until reaching the top 3, the purchasing team needs to be rigorous about supplier selection criteria to avoid problems hiring companies that could let your business down.

We have separated five requirements that should be considered from market research to the final choice. Check them out!

1. Market experience

The first criterion for selecting suppliers is market experience . The time and history of operation, as well as the achievements and infrastructure that the company offers to its customers, are indicators of the solidity of the business.

Who the owners are, their qualifications, as well as those of the team, add up to important points when considering a company as an option.

2. Knowledge about solutions

When you speak to a potential supplier’s customer service team or directly to the business owner, take note of their knowledge of the solutions they sell.

In addition to offering the most up-to-date inputs or services on the market, can they clearly explain the advantages of each option? Are their arguments clear? Do they show their preference in the negotiation and confidently defend what they are selling?

The answer to the questions must be a unanimous ‘yes’.

3. Credibility

A company’s reputation in the market is another fundamental criterion when selecting suppliers. Therefore, do not be superficial in your research. Look for channels other than search engines, such as social networks, supplier websites, online review sites, among others.

If what the company sells matches what people say about it, the chances of it being a good partner increase.

4. Transparency

Transparency may seem like a subjective criterion, but it is more tangible than you might think. The way a supplier conducts negotiations, being consistent in all arguments for closing the proposal, without contradiction, is an example of transparency.

The same should happen with contracts and financial obligations involved in transactions. Any “trick” in the process is a red flag. Be careful!

5. Customer evaluation

In the internet age, it is difficult to make a purchase or choose a business partner without knowing the opinion of someone who has already gone through the process, do you agree?

So, research who the suppliers’ partners are, whether they are reliable companies, what positive points they raise and what types of criticism/improvements are pointed out. This way, you can assess whether or not it is worth doing business with them.

While periodic predictive analytics is a discussed topic much today, in itself, it is quite an old concept. Mostly different now is that we can count on exponentially greater computing power and data volumes compared to then.

To understand the subject better, in the article we explain what predictive analysis is, how it works and why it is important. We also show you advantages offered, its relation to other technologies and application examples so that you understand why you should perform this kind of analysis.

Happy reading!

What is predictive analytics?

Predictive analytics — or predictive technical analytics — is a way of performing advanced analysis to check data or content in order to answer the question: what might happen in the future?

To do this, statistical modeling techniques, Big Data and machine learning are used, which allow historical data to be extracted and predictions to be made.

This predictability is possible due to the capacity of Big Data, which obtains data through several interconnected systems. They can be interpreted to verify how a group or a person will behave in relation to a certain context.

How does it work?

This predictive model is nothing more than a mathematical function, which performs a complex statistical calculation to present possibilities to a manager.

In this sense, a retail company, for example, can use a wide variety of data as a basis to understand that demand for a product may increase at a certain time of the year.

Based on this prediction indicated by the algorithm, decision-makers can understand that it is necessary to reinforce stock to meet demand, avoiding being caught by surprise.

How important is predictive analytics?

In an economy with fierce competition, the use of this tool becomes an important differentiator. After all, who wouldn’t want to be more certain about the likely outcomes of a decision?

In this regard, the value of predictive analysis lies in the very prevention of the events themselves based on the trends, traceable from similar circumstances encountered in the past.

What are the benefits of predictive analytics?

What is the most significant benefit of predictive analysis? It is that it enables companies to learn from their experiences – from their data – and to take effective measures to apply what has been learned toward better futures.

Below, see other important advantages:

• eliminates the burden of manual data analysis and minimizes errors;
• generates competitive advantage in the market;
• improves customer satisfaction;
• increases the chances of successful product launches.

How does predictive analytics relate to other technologies?

To perform predictive analysis, the company needs to keep in mind that it is a process that requires several other enabling technologies. Below, learn about the main ones.

Predictive Analytics and Artificial Intelligence

Here, we have two terms that are similar and closely related. This is because Artificial Intelligence is the fuel of predictive analysis, since this method considers not only historical data, but also seeks to predict various future possibilities.

To do this, you need applications capable of feeding the algorithms with external data collected in real time, to find patterns, behaviors and design future scenarios.

Predictive Analytics and Big Data

Big Data is the backbone framework under which data-gathering applications are implemented. It will be the raw material from which algorithms and models will be built. Hence, good interfaces to Big Data must be important in effective predictive analytics.

Predictive Analytics and Business Intelligence

Business Intelligence is the process of gathering, storing, and analyzing business data to extract insights that help drive better decision-making.

Therefore, when a company performs a predictive analysis, it is applying a BI action. With this, it obtains proposals for executable actions that enable better solutions.

What are the 3 Vs of predictive analytics?

Predictive analytics relies on Big Data. This technology is based on five Vs, identified as volume, variety, veracity, velocity, and value. Three of them are fundamental to the success of predictive analytics — as we will show below.

Variety

It is very important to have a good diversity of data sources and formats, to obtain a deeper analysis. In addition, this aspect helps to obtain less “biased” results — often caused by a single database.

Truthfulness

Veracity is an essential aspect: there is no point in having a large volume of data if the information is not reliable. Therefore, before carrying out any type of analysis, it is important to question whether the source of such data is reliable.

Speed

Just as important as having reliable and diverse data is having the agility to process it. This is because many of the insights may no longer be useful if the timing is lost.

In this sense, a good platform needs to have the ability to cross-reference information collected in real time, to generate accurate predictions based on the analyses.

What are examples of the application of predictive analytics?

Predictive analysis is part of the routine of large companies in a wide range of segments. Below, see some examples of its application.

Churn prediction

Predictive analysis can predict when certain customers are no longer satisfied with the solutions offered. This way, the company can plan better , based on a review of its weaknesses.

This allows you to develop new retention strategies or, in difficult scenarios, at least better prepare for customer loss.

Upsell and cross-sell

In contrast to churn prediction, in this aspect, the company can perceive the customer’s willingness to be interested in a new product.

This way, it is possible to approach it more precisely to offer a more advantageous upgrade for the customer and more profitable for the company.

Agribusiness

One of the biggest challenges that this technology allows us to overcome is knowledge about the climate and the conditions that impact planting.

Based on historical data and the help of advanced algorithms, we are able to predict events and receive insights on measures to overcome them, making the production chain more flexible to survive climate change.

The information also increases business leaders’ visibility into the level of waste and losses, among other aspects.

The use of field data and the automation of agricultural equipment make it possible to carry out rural activities more effectively and on a broader scale. An example of this is an autonomous tractor, which can receive weather forecast data.

Using this information, the equipment identifies when it can carry out its work in better weather conditions. Therefore, if the weather worsens, it can stop automatically and continue the interrupted task as soon as the situation changes.

In this way, agricultural management can incorporate predictive analysis, with a focus on the evolution of cold chain chains, to avoid losses , increase productivity and get ahead of the competition in terms of traceability, quality and reliability.

One of the biggest nightmares for business owners — or freelancers in particular — is the efficient management of their finances. To achieve this, it will be necessary to master other types of company cycles, such as operational and financial cycles.

After all, they help you calculate the real economic situation of your business and, therefore, help you take the best decisions for improving your results. Since this is a subject on which the maintenance and growth of your company depend, we have prepared this complete post so that it answers all your questions.

Next, you will understand the concept of each of these two cycles and discover how to calculate them correctly, among other relevant points. Keep reading!

Why is it important to understand the operating and financial cycles?

To care for the financial health of the company is essential. It’s only when there is proper management of resources that a good stock can be maintained, and investments can be made in new solutions, measures to ensure profitability in the short, medium, and long terms.

However, many entrepreneurs fail to analyze their company’s financial situation and, therefore, cannot make a very sound decision. The big issue is that a wrong decision-or-a wrong time decision-is one of the most common causes of business failure.

To prevent this from happening, managers need to understand how to properly manage the operational cycle and the financial cycle. Both refer to your company’s need for financial resources. In other words, they are linked to the inflow and outflow of money.

It is important to note that both cycles take into account the average storage period, which often does not receive due attention from entrepreneurs. In addition, they are related to the liquidity and profitability of the enterprise, considering that:

• liquidity — the ease with which an asset can be turned into cash;
• profitability — refers to the analysis of results taking into account investments , costs, among other factors.

Thus, both are essential for analyzing the need for working capital , as well as for projecting cash flow. In practice, they become extremely important tools for decision-making, as mentioned, and for improving business results.

What is the operating cycle?

This is the sum total of all phases of a business operation. In simple words, the operating cycle begins with the purchase of raw materials, proceeds with payments to the suppliers, manufacturing of the product and sales, and comes to an end by receiving payment for the sale of the merchandise. This, in simple words, comprehends the whole time phase of inflow and outflow of cash.

For this reason, calculating the operating cycle is essential to determine the value of working capital and to more effectively control inventory. Another important point to be analyzed is that the shorter the operating cycle, the better, because it will be possible to quickly reach the payment stage.

To understand it more easily, it is interesting to think about agricultural activities . In this context, it begins when the producer buys the seeds and ends after the harvest, when he receives payment for the production. These are longer cycles, but with a fixed date due to the harvests.

On the other hand, industrial cycles are shorter. After all, raw materials are constantly arriving and production is constant. As a result, products are delivered more frequently.

So how to calculate it?

The formula for the operating cycle is not at all complex. Development involves the sum of the average time that raw materials and finished products are stored and the average time between sale and receipt. Therefore, it is simply organized as follows:

operating cycle = average storage period + average receipt period

Example: suppose the company’s average storage period is 20 days and an average receipt period is 64 days. The operating cycle will therefore be 84 days.

Therefore, it means that for the firm to buy the raw material, get it on the production line, manufacture the chairs, sell them, and receive payment will take 84 days.

What is the financial cycle?

It is the process of raising, managing, and using capital in your business. Source of obtaining resources sets in, then allocation continues until their use to repay debts or gain more funds for investment.

In simple words, it is the time gap between the outflow and inflow of cash into the cash register. Simple words: Time gap between the conversion of capital of a company into a product or service that is sold to its clients. That is why it is also known as the “cash cycle”.

Therefore, the shorter the financial cycle, the better for the business, as this means that there is an effective financial organization . Therefore, contrary to what many managers imagine, a negative financial cycle is excellent, as it shows that the company receives payment for the goods sold before it even needs to pay suppliers.

How to calculate it?

The calculation of the financial cycle depends directly on the result of the operating cycle. Simply use the following formula:

financial cycle = operating cycle – average payment term to suppliers

Let’s use the same example of the chair factory? We already know that it has an operating cycle of 84 days.

Let’s say, then, that the average payment term to suppliers is 60 days. Therefore, we have a financial cycle of 24 days. This means that the company pays its suppliers 24 days before receiving the sales value.

In other words, during this period, it is necessary to use working capital to finance your operations. In this sense, one of the ways to reduce the financial cycle is by negotiating better terms with suppliers.

How to effectively manage the operational and financial cycle?

To effectively manage the operational and financial cycle, the following actions must be implemented:

• establish budgets, forecasts and financial goals;
• adjust the stock level to avoid excess or shortages;
• implement efficient collection processes to maximize cash flow and ensure payment of bills on time;
• control expenses, avoiding unnecessary spending and prioritizing those that add value to the business;

Such initiatives could be introduced through technological instruments, including financial management software that helps to automate and integrate processes.

As you can see, knowing the operational and financial cycles of a company is as critical in ensuring that its accounts are well-balanced as it is in defining the best strategies for expanding the business. That is why you must constantly monitor the results and develop tactics that aim to reduce them in order to manage them properly.