A company buys goods on 2 months credit.Raw materials are converted into finished goods in approximately 1.5 months,and then typically sold 1 month later.Sales are on credit and customers typically take 1 month to pay for the goods.
What is the Cash cycle for the company?

Question

Quizplus · Accepted Answer

The Cash Cycle is: Inventory time + Creditor time - Debtor timeIn this example, the inventory time is 2.5 months - the 1.5 months to convert the goods, plus the shelf time of an additional month.The creditor time is 1 month.The debtor time is 2 months.2.5 + 1 -2 = 1.5 monthsAnother way to think about this is the time between paying for the goods and being paid for the goods.Consider a supermarket, where they may take 3 months to pay for an item such as a lettuce, which is on the shelf for a day or two, and the customer will pay immediately. They have a negative cash cycle.

A Company Buys Goods on 2 Months Credit