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ACCA Applied Skills · Financial Management · Determining working capital needs and funding strategies

Which change would shorten an entity's working capital cycle (cash operating cycle)?

Reducing the average time finished goods are held lowers inventory days, which shortens the working capital cycle. The other actions either lengthen receivable or inventory days or reduce payable days, and each of these lengthens the cycle.

  1. APaying suppliers earlier to obtain a larger settlement discount
  2. BReducing the average time that finished goods are held before saleCorrect
  3. CExtending the credit period offered to customers
  4. DHolding higher raw material inventory to avoid stock-outs

Explanation

The cycle is inventory days plus receivable days minus payable days. Holding finished goods for a shorter time reduces inventory days and so shortens the cycle. Paying suppliers earlier reduces payable days, and longer customer credit or more raw materials lengthen the cycle.

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