CHAPTER 17 - CASH OPERATING CYCLE Flashcards
Name one of the main reasons firms go bankrupt?
Lack of working capital
Name reasons that may cause a shortage of cash
Overtrading - too many orders, insufficient funds to deliver
Fall in orders - debtors decrease, less cash inflows
Recession - debtors taking longer to pay
Paying creditors early
Poor stock management - too much or obsolete
Poor collection procedures
Explain the steps in the Trading Cycle
Purchase raw materials
Process into finished product
Hold stocks
Sell to customer
(and start again)
Describe the cash operating cycle and name the steps
- Each step in the trading cycle requires cash shown by the cash operating cycle
- The cyce is continous - each step continually happening
- Measures the length of time between paying for stock / raw materials and receiving payment from customers
- The shorter the better
- Pay for raw materials
- Pay production costs
- Pay overheads
- Receive cash from customers
Name the factors determining length of the cash operating cycle
- How long materials / stock held before being processed / sold
- How long the production process takes
- How long finished stock held before sale
- How long customers take to pay
What calculation is used to measure the length of the cash operating cycle?
Stock turnover days + Debtor collection days - Creditors payment days = days cash cycle
Explain ‘Stock Turnover Days’
Average Stock / Cost of Sales x 365
Always round up to the nearest day
Average stock = opening stock + closing stock / 2
If no opening stock figure is given just use the closing stock figure as the average stock figure
Explain Debtor Collection Days
Debtors / Sales (credit) x 365 days
Always round up to the nearest day
Explain Creditor Payment days
Creditors / purchases (credit) x 365 days
Always round up to the nearest day
