The operating cycle

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 that 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. Once we've purchased that inventory we 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 need sheetrock, we've got to…