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Dear tutors,
I am having one problem with this question.
In the question, it is said that “A review of the management accounts shows the payables payment period was 56 days for August 20X7, compared to 87 days for September 20X6. The finance director anticipates that the September 20X7 payables payment period will be even lower than those in August 20X7.”
In the answer, it is said that ” The forecast profit is higher than last year, indicating an increase in trade, also the company’s cash position has continued to deteriorate and therefore, it is unusual for the payables payment period to have decreased”
I dont really understand the logic here. Why low cash proves an unusual decrease in payables payment period?
Hope to receiving your help.
Many thanks.87 days reduced to 56 days means suppliers are being paid more quickly – not something you would expect if the company has liquidity issues – the first thing a company will generally do if it has less cash is take longer to pay suppliers – i.e. average payment days will increase.
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