If a company's operating cycle is much longer than its average payment period for suppliers, it creates the need to borrow money to fund its inventories and accounts receivable.

Question

Quizplus · Accepted Answer

If a company's operating cycle (the time it takes to convert inventory into cash) is longer than its average payment period for suppliers (the time it takes to pay its bills), then the company must pay for its inventory and other expenses before receiving payment from customers. This creates a temporary cash shortfall and may require the company to borrow money to finance its operations.

If a Company's Operating Cycle Is Much Longer Than Its