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Chapter 7

Factors affecting the length of the cycle depend on:

 liquidity versus profitability decisions

 terms of trade

 management efficiency

 industry norms e.g. retail versus construction.

The optimum level of working capital is the amount that results in no idle cash or
unused inventory but that does not put a strain on liquid resources.

Question 2

Cash operating cycle

A company has provided the following information:

Raw material inventory holding period 25 days

Payables payment period 40 days

Production period (WIP) 5 days

Finished goods holding period 15 days

Receivables collection period 66 days

Calculate the length of the cash operating cycle.

Cash cycle = 25 – 40 + 5 + 15 + 66 = 71 days

Illustrations and further practice

Now try TYU question 1 from Chapter 7.

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