Business Cash Cycles

Question 1

Long-term borrowing is caused by:

Answer 1

A permanent lengthening of the cash cycle (declining inventory)

A permanent increase in the amount of cash needed daily (sales growth)

Question 2

Short-term borrowing is caused by:

Answer 2

A temporary lengthening of the cash cycle

A temporary increase in the amount of daily cash requirements

Question 3

Cash Cycle Formula

Answer 3

For Distributors:
Average days’ sales in receivables
\+ Average days’ COGS in inventory
– Average days’ COGS in payables
= Average days in cash cycle

For Manufacturers:
Average days’ sales in receivables
\+ Average days’ COGS in inventory
– Average days’ purchases in payables
= Average days in cash cycle (using days’ purchases in A/P)