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Dear Sir,
While practicing my question bank, I came across the analysis of a proposal for a company to extend it’s payment terms to suppliers to free some cash for organic growth.
(Part of) the answer was: “Extending the supplier payment terms from 20 days to 40 days will free up $75,500 for investment”.
I tried to look into it and search back my notes but I really cannot figure out how the free cash is calculated?Data is:
AP = 75k
COS= 1375k
Could you enlighten me?Many thanks,
AnneAssuming inventory stays constant CoS = Purchases
1,375,000/365 = 3,767 = purchases per day = payments per day once if creditors stay constant.
If the firm stops paying for 20 days, then starts up again at its normal rate, it will have kept back cash of 3,767 x 20 = 75,340
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