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Chapter 3. Financial and Business Planning > The Company's Business Cycle

The Company's Business Cycle

Understanding the company's business cycle is important for financial forecasting and for understanding the company's cash flow. Figure 3-1 presents the business cycle of a typical company: The company's equity providers or debt holders infuse money (in the form of capital and debt, respectively) into the company's cash account. This cash is used by the company to pay for services, salaries (human capital), and raw materials for the production process and to purchase production equipment. The human capital and the raw materials are used for the development and production (through means of production such as machinery and computers) of services and products. Products pass through the company's inventory and are sold to customers, and services are provided to customers directly. Customers either pay for the products or services in cash or receive credit from the company that is paid later. At the end of each period (cycle), any cash not returned to the company's debt holders is paid to the tax authorities, distributed to the shareholders in the form of dividends, or is re-invested in the company to allow further business cycles.

Figure 3-1. The Company's Business Cycle


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