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Hello sir.
why are the Receivables financed by overdraft? and we are we need to finance receivables? inventory i understand. But why we need to finance money that’s already ours.
2) Operating cycle=Inv days + Rec days – Payable days
why not we adding cash? (isnt it the part of Working capital?)
Nobody (and certainly not me in my lectures) says that receivables have to be financed from an overdraft!!!
Suppose you buy goods from me for $100 and take two months to pay me. For those two months I have less cash than I would have had if you had paid me immediately, or if I was already overdrawn then I for those two months I will have a bigger overdraft than if you had paid me immediately.
If I have plenty of cash, then having less cash for two months is losing me interest that I could otherwise have earned on my cash. If I am currently overdrawn, then for those two months I am paying extra interest on the overdraft.
In the exam, it is normal for the examiner to make it clear that they are currently overdrawn. He does this simply to make it completely obvious what the interest cost of the two months delay will be.
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