Companies make expenditures on an ongoing basis to operate and maintain their business, and this is part of a cycle of incurring and paying expenditures. Management usually wishes to minimize the company's cost to acquire and maintain its inventory, supplies and costs as part of the expenditure cycle .
The company has other cycles, including a revenue cycle that tracks customer orders and sales forecasts, and a production cycle which includes business activities and information that comes from the product manufacturing process. A company’s expenditure cycle revolves around information from inventory and other items that it needs to purchase.
The Expenditure Cycle in Action
Information flows to and from the expenditure cycle. The production cycle and the sales cycle both provide information about when and how much money a company needs to spend on additional inventory, for example.
Information flows from the expenditure cycle regarding the amount of new inventory received, the amount of money to pay and the due dates of payments. Companies typically use three different types of transactions in their expenditure cycle, including a cash disbursement, a credit purchase and a purchase return.
Explain the Purchasing Cycle
A company typically initiates a purchase by preparing a purchase order. This document is sent to a vendor, and the vendor fills the order and prepares a bill, noting the purchase order number. Once the vendor ships the inventory, the receiving company records the receipt, forwarding it to its accounting department, while placing the physical goods into a storage area to be sold or made into other goods for sale.
Companies must manage inventory by keeping count of the units in stock and determining the velocity or speed at which those items sell. The purchasing department, over time, can estimate how often it must make a new purchase order or a new inventory order to keep items in stock on a continuous basis.
Showing Expenditures on Financial Statements
When a company purchases inventory, it shows the purchase as an expense on its income statement. The timing of the expense differs, depending on whether the company uses accrual or cash-basis accounting. If the company bought the inventory on credit, you would see the inventory purchase on the balance sheet as an asset, and also as an accounts payable amount.
As part of a company's expenditure cycle, its accounts payable balance may continue to grow as it spends more money to acquire inventory and services. Each month, the company makes payments to reduce the balance of accounts payable, or its money owed to vendors.
Once the company pays a bill and reduces its accounts payable balance, it has completed the expenditure cycle. Companies have other operations in a cycle, including a payroll cycle where a company records wages earned by employees and then issues periodic paychecks.
A sales or revenue cycle takes place when the company sells goods or services, delivers them to customers, issues an invoice and receives payment. A financing cycle takes place when a company issues debt, such as corporate bonds, and then pays it off.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer and editor for several online finance and small business publications since 2011, including AZCentral.com's Small Business section, The Balance.com, Chron.com's Small Business section, and LegalBeagle.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.