WC cycle Flashcards
What is the working capital cycle?
The working capital cycle is the time taken between outlaying cash for raw material and receiving cash from product sales.
What are debtor days?
Debtor days measure the average number of days a company takes to collect payment after a sale.
How do you calculate debtor days?
Debtor days = (Accounts Receivable / Revenue) x 365.
What are creditor days?
Creditor days measure the average number of days a company takes to pay its suppliers.
How do you calculate creditor days?
Creditor days = (Accounts Payable / Cost of Goods Sold) x 365.
What are inventory days?
Inventory days measure the average number of days a company holds inventory before selling it.
How do you calculate inventory days?
Inventory days = (Inventory / Cost of Goods Sold) x 365.
True or False: A shorter working capital cycle is generally better for a business.
True.
What is the formula for the working capital cycle?
Working Capital Cycle = Debtor Days + Inventory Days - Creditor Days.
Fill in the blank: If a business has 30 debtor days, 60 inventory days, and 45 creditor days, its working capital cycle is ____ days.
45 days.
What does a high debtor days figure indicate?
It indicates that the company takes longer to collect payments from customers.
What does a low creditor days figure suggest?
It suggests that the company pays its suppliers quickly.
What is the impact of high inventory days on working capital?
High inventory days can lead to increased holding costs and reduced liquidity.
True or False: Increasing creditor days can improve a company’s cash flow.
True.
What is the significance of managing the working capital cycle?
Effective management ensures liquidity, reduces costs, and improves profitability.
Which financial ratio is closely related to working capital management?
Current ratio.
How can a company reduce its debtor days?
By improving credit control and offering discounts for early payment.
What is the relationship between inventory turnover and inventory days?
Higher inventory turnover results in lower inventory days.
Fill in the blank: A working capital cycle of 0 days means a company has ____ cash flow.
Optimal cash flow.
What role does technology play in managing the working capital cycle?
Technology can streamline processes and improve tracking of receivables and inventory.
True or False: Seasonal businesses typically have a stable working capital cycle year-round.
False.
What is one strategy to improve inventory management?
Implementing just-in-time inventory systems.
Why is it important to monitor the working capital cycle regularly?
Regular monitoring helps identify potential cash flow issues and operational inefficiencies.
What impact does a longer working capital cycle have on a business?
It can lead to cash flow problems and increased financing costs.
How can a company effectively manage its creditor days?
By negotiating better payment terms with suppliers.
What financial statement is most useful for analyzing the working capital cycle?
The balance sheet.
