The Cash Cycle The time between payment for inventory and receipt from the sale of inventory a Cash cycle operating cycle-accounts payable period a Accounts payable period time between receipt of inventory and payment for it The cash cycle measures how long we need to finance inventory and receivables 5
5 The Cash Cycle n The time between payment for inventory and receipt from the sale of inventory n Cash cycle = operating cycle – accounts payable period q Accounts payable period = time between receipt of inventory and payment for it n The cash cycle measures how long we need to finance inventory and receivables
Table 16.1 TABLE 16.1 Managers who deal with short-term financial problems Duties Related to Short-Term Title of Manager Financial Management Assets/Liabilities Influenced Cash manager Collection,concentration,disbursement;short-term Cash,marketable securities, investments;short-term borrowing;banking relations short-term loans Credit manager Monitoring and control of accounts receivable;credit Accounts receivable policy decisions Marketing manager Credit policy decisions Accounts receivable Purchasing manager Decisions on purchases,suppliers;may negotiate Inventory,accounts payable payment terms Production manager Setting of production schedules and materials Inventory,accounts payable requirements Payables manager Decisions on payment policies and on whether to take Accounts payable discounts Controller Accounting information on cash flows;reconciliation of Accounts receivable,accounts payable accounts payable;application of payments to accounts receivable Source:Ned C.Hill and William L.Sartoris,Short-Term Financial Management,2nd ed.(New York:Macmillan,1992),p.15. 6
6 Table 16.1
Example Information Item Beginning Ending Average Inventory 200,000 300,000 250,000 Accounts 160,000 200,000 180,000 Receivable Accounts 75,000 100,000 87,500 Payable Net Sales $1,150,000 Cost of Goods Sold $820,000 7
7 Example Information Item Beginning Ending Average Inventory 200,000 300,000 250,000 Accounts Receivable 160,000 200,000 180,000 Accounts Payable 75,000 100,000 87,500 Net Sales = $1,150,000 Cost of Goods Sold = $820,000
Example:Operating Cycle Inventory period aAverage inventory=(200,000+300,000)/2=250,000 Inventory turnover 820,000/250,000 3.28 times Inventory period 365/3.28 111 days Receivables period Average receivables =(160,000+200,000)/2 =180,000 Receivables turnover 1,150,000/180,000 6.39 times Receivables period 365/6.39 57 days Operating cycle 111 57 =168 days 8
8 Example: Operating Cycle n Inventory period q Average inventory = (200,000+300,000)/2 = 250,000 q Inventory turnover = 820,000 / 250,000 = 3.28 times q Inventory period = 365 / 3.28 = 111 days n Receivables period q Average receivables = (160,000+200,000)/2 = 180,000 q Receivables turnover = 1,150,000 / 180,000 = 6.39 times q Receivables period = 365 / 6.39 = 57 days n Operating cycle = 111 + 57 = 168 days