Different types of businesses have different cash flow cycles. Which of the following statements describe the cash flow cycle of retailers and which describe the cash flow cycle of manufacturers?

Question

Quizplus · Accepted Answer

The cash flow cycle of a business refers to the pattern of how cash enters and exits a company over a period of time. Retailers and manufacturers have distinct cash flow cycles due to the nature of their operations. Here's how the statements provided relate to each of them:
a. Sell finished goods on credit to customers = Manufacturers
Manufacturers often sell their finished goods on credit to customers, which means they may have to wait for payment after the goods have been delivered. This can lead to a gap between when the costs are incurred to produce the goods and when the revenue is received.
b. Turn raw materials into finished goods = Manufacturers
Manufacturers purchase raw materials and use labor and overhead to convert these materials into finished goods. This process is a key part of a manufacturer's cash flow cycle, as it involves significant upfront costs before the product can be sold.
c. Sell bought in goods to customers for cash = Retailers
Retailers typically purchase finished goods from suppliers or manufacturers and sell them directly to customers for cash or immediate payment. This means that retailers can often recoup their investment quickly, shortening their cash flow cycle.
d. Goods for resale purchased on credit from suppliers = Retailers
Retailers often purchase inventory on credit from suppliers, which allows them to stock their shelves without immediately paying out cash. They then sell these goods to customers, ideally before the payment to suppliers is due, which helps manage their cash flow.
In summary, manufacturers have a cash flow cycle that involves selling on credit and turning raw materials into finished goods, which can lead to longer periods before cash is received. Retailers, on the other hand, tend to buy goods on credit and sell for cash, which can result in a quicker cash conversion cycle.

Different Types of Businesses Have Different Cash Flow Cycles