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good evening.
an MCQ goes as:
which of the following might be associated with a shortening of working capital cycle.
a. lower net operating cash flow
b. taking longer to pay suppliers(there were 2 other options that i was able to eliminate)
the naswer is b but i chose a
i felt it was a toss up between the two. my thinking was as follows:
taking longer to pay suppliers wil reduce the operating cycle,, which will reduce the WC cycle
so if we had a lower net operating cashflow, that would sort of cover the increased length of payments to supplier
so thats why i chose a.
can u pls explain
thanks
B is correct, for the reason you have written.
The reason that A is not correct, is that if the operating cash flow is lower it means that everything is lower (sales, cost of sales and therefore receivable, inventory, and payables).
That alone does not mean that we take longer any longer to collect receivables, or to pay payables, and therefore it does not mean that the working capital cycle will be any lower.(If sales are half, then you would expect receivables to be half as well – the receivables days will only change if you collect faster or slower)
hmmm…thanks
just a few clarifications:
1.net operating cycle = operating cycle?
2. operating cycle and working capital cycle both behave the same way?
3. short wc cycle means increased profitability?
4. long wc cycle means lower profitability?
1. Yes
2. They are different names for the same thing
3 and 4. Not necessarily, because other things affect profitability as well. However, the shorted the working capital cycle the better.
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