Join Jim Stice for an in-depth discussion in this video The operating cycle, part of Finance Foundations.
- 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 that I need detailed timely information. In this section we're going to talk about short-term financial management. We're going to illustrate that using the operating cycle of a wholesale building supply company. You'll notice in this diagram that we've got various points on the clock.
We'll begin with cash, we take that cash and we have to purchase inventory, so we have to have relationships with our suppliers. You'll note at the 2:00 on the diagram that we're talking about purchasing inventory. 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 at the 4:00 we've then got to manage our inventory. The last thing we want is not enough inventory. The worse thing that can happen to a business is to run out of inventory.
When a contractor comes in and needs sheetrock we've got to have it. We don't want to ever run out of inventory, but then we don't want too much inventory. We've got to have what they need when they need it. Then we'll have customers come in to make the purchase. They'll want to buy stuff from us. We've got to manage relationships with our customers. We'll have large customers, we'll have small customers, we'll have customers we like, we'll have customers that aren't our favorites, we've got to ensure that we have a system to manage those relationships.
You'll note, once we make the sale at the 8:00 we end up with the receivable. We've got to manage our receivables as well to ensure that we have prompt collections. We'll provide these contractors with terms, but if we don't send them 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 receivables to cash works, and that we eventually get our cash in a timely fashion. We're going to have to manage this operating cycle continuously, and we'll need information to do that.
In this chapter we're going to talk about managing our cash. What we can do to best manage our cash. We're going to talk about managing our receivables to ensure that our receivables get turned into cash in a timely fashion. We're going to talk about how best to manage our inventory to ensure that we have just the right amount of inventory when the customer comes in. We'll also talk about those instances when we may have a shortfall of cash. How do we obtain short-term financing? Then finally in this chapter we'll talk about internal controls.
How to make sure that this system of converting inventory to receivables to cash works.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans