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Which one of the following would lengthen the working capital cycle?
A Delaying payments made to suppliers
B Reducing raw material inventory
C Increasing the turnover of finished goods inventory
D Increasing credit given to customersThe answer given in my book is D .My doubt is even INCREASING THE TURNOVER OF FINISHED GOODS INVENTORY would lengthen the working capital cycle rite
No, If you are increasing inventory turnover you are reducing the inventory conversion period and therefore the financing requirement.
Let us say for instance that instead of turning over inventory 6 times. a year a company increases this to 12 times a year.In terms of financing it now needs to finance one months inventory instead of two months worth.All other things being equal the cash conversion cycle will have been shortened.If you have any questions please ask.
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