reading #39-pracice problem #5 increase, suppliers, something, collection

atate2007

Can anyone shed some light on this problem for me. Or rather the solution they have on the back of the book. It says that if a company's increase in days payable from 35 to 40 days increased, it SHORTED ITS CASH COLLECTION CYCLE, thus contributing to liquidity. I thought that an increase in taking time to pay suppliers decreases liquidity. am i missing something. and how does that shorten it's cash collection cycle.

xilinx_altera

Cash collection cycle = (Days of Inventory on hand) + (Days of Sales outstanding) - (Days of payables).

Days of payables goes up => cash collection cycle decreases

jmh530

Cash collection cycle = (Days of Inventory on hand) + (Days of Sales outstanding) - (Days of payables).

Days of payables goes up => cash collection cycle decreases (you substract it)

=> it takes longer to pay the suppliers so you have the liquid asssets on your hands for more time => increase in liquidity.

BelalM

These relationships are really important, I would do as many of these problems as possible. Costintira is correct. Just think about what you would want to do to "cheat" if you were the company. You would want to stretch out your payables to delay paying your supplier so that you can keep that cash. Or you want to decrease days of inventory or DSO, AKA sell off receivables on that last one.

chandsingh

thank you kindly for your responses. makes perfect sense now.