A firm has days’ sales in inventory of 105 days, an average collection period of 35 days, and takes 42 days, on average, to pay its accounts payable. Taken together, what do these three figures imply about the firm’s operations and its cash flows?
Inventory Sales = 105 days
Average collection period = 35 days
Average payment period = 42 days
This is the detail that implies sale of inventory after every 105 days, the firm will have plenty of cash to manage its day-to-day operations as they have been receiving payment after approximately 35 days/less but payment is to be made after 42 days.
So, average of almost 7 days is with firm to employ their cash inflow before making payment to the outside suppliers. So, in short, the firm is managing its cash flows effectively and efficiently in order to manage its day-to-day operations as well.