Cara Westerman recently inherited the family business, Westerman Furniture Company. The company had built its reputation by selling to young couples, often newlyweds, who had little money to put down and often made monthly payments over one or two years to pay off the balance.
Cara notices that the company has a lot of past due bills from furniture companies and little cash, even though sales are at record levels. She has asked you, the company's accountant, to write a short memorandum to help her understand why the company is short on cash. One of the first things you note is that it takes about four months on average to sell the furniture after receiving it, and the furniture companies expect payment in 60 days. In your memo, include an explanation of the operating cycle as it applies to Westerman Furniture Company?