- Remember, when we're talking about finance,
we're talking about identifying the resources
that we need, determining the best way
to get the money to buy those resources,
and then managing those resources effectively.
To do these things, we need detailed, timely information.
Let's now focus on short-term financial management.
We are going to illustrate this
using the operating cycle
of a wholesale building supply company.
You will notice in this diagram
that we've got various points on the clock.
You'll note at two o'clock on the diagram
we are purchasing inventory.
We typically purchase inventory on credit,
so we have to have financial trust
from our suppliers.
Also, from an operations standpoint,
we've got to have suppliers that we can count on
to get us what we need when we need it.
Once we've purchased that inventory,
we've then got to manage our inventory.
The last thing we want is to not have enough inventory
to satisfy our customers' demands.
The worst thing can happen to a business
is to run out of inventory.
When a contractor comes into our building supply business
and needs sheet rock, we've got to have it.
We don't want to ever run out of inventory,
but then we don't want to have too much inventory.
Where will we store it?
How will we pay for it?
Now you'll note in the diagram
that once we make the sale on credit,
we end up with the receivable.
We've got to manage our receivables
to ensure that we have prompt collections.
If we don't send our customers a bill,
they're not just going to magically pay us.
We've got to manage our receivables
to ensure that this operating cycle,
this conversion from inventory to receivable to cash,
functions so that we eventually collect
all of our cash in a timely fashion.
We're going to have to manage
this operating cycle continuously,
and we will need information to do that.
Managing a company's operating cycle
is like directing an orchestra.
Each supplier and each customer
plays a part in the orchestra,
and the manager needs to make sure that the inventory flows
and the cash outflows and the cash inflows
all occur at the right time.
That's operating cycle management.