Page 292 - F3 -FA Integrated Workbook STUDENT 2018-19

Chapter 20

3.10 Payables payment period: reasons for movement

 new credit arrangement

 new supplier

 higher days may indicate inability to pay

 increasing payment period may give an entity a reputation as poor payer.

3.11 Working capital cycle

Purchase inventory Pay supplier Sell inventory Customer pays

Inventory days Receivable days

Payable days

Working capital cycle

The calculation of the working capital cycle is:

Inventory days + Receivable days – Payable days

 Working capital cycle represents period of time for which inventory is funded,
i.e. from date of payment to supplier to date payment is received from
customer.

 Shorter working capital cycle indicates higher level of efficiency.

 Working capital cycle may be shortened by reducing inventory and/or
receivable days and/or increasing payable days.

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