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I read a paper talking about the Operating Cycle. On page 6th, they said:

Sales of assets, no matter how disguised, are one-time events. In contrast, cycling capital through the cycle and generating cash contribution margins from operations hopefully is a repeatable event and the event of economic consequences that justifies the existence of a firm. It is the well of economic returns

From my understanding, sales of assets above mean that the company sells the timber, or oil, or cash equivalents, and they are one-time events. Then,"cycling capital through the cycle" means dollar leaves cash and go through other asset account, and $1.05 comes back into cash after a number of days. Then "contribution margins" means selling price per unit minus variable cost per unit.

I am wondering why they hope it is a repeatable event, and what does "event of economic consequences" mean in this sentence?

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When one is running a business to survive, it must have an operating cycle, wherein capital, meaning everything that has been invested in the company, produces economic returns repeatably.

The word "cycle" implies "repeatable". The author is pointing out that one-time sales of asset are by definition not repeatable. For example, if you sell a big factory so that you can subcontract your manufacturing to other companies, you have done something that can't be repeated. Doing that has an economic consequence in that the company receives money for the sale, but just once. Once sold, it can't be sold again.

So, both one-time sales of assets, and generating cash ... from operations are "events of economic consequence", but only the cash from operations is repeatable and sustainable.

Why do they hope returns are repeatable? Because they want to stay in business as a company.

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  • Hi there, thank you for your dedicated explanation, I am wondering your last sentence, why "Why do they hope returns are repeatable? Because they want to stay in business as a company." ? Do you mean that they need to create returns(money) to stay in business? May 24, 2021 at 9:59
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    You're welcome. Yes, that's right. A business is a repeating operation of making money. May 24, 2021 at 11:30

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