Question

 

The company has a negative net operating cycle which shows that the company is effectively using the money of its creditors as working capital. It took the company 36 days on average to sell its inventories and 36.64 days to receive cash from its customers i.e. distributors, etc. but it delayed the payment to its suppliers till the 140th day. While it is a good for the company’s shareholders that the company is keeping its working capital low, they need to make sure that the very long days payable outstanding is not due to any liquidity problem.

 

Answer 1

Working capital = Current assets less Current liability

Lowe working Capital compared to required Working capital will damage to Liquidity of Business. But Question is How to determine Required Working capital?

Required Working capital determine based on Credit policy for Customer, holding period of Inventory. Credit Policy for payment for raw material inventory purchased.

If your Company is big and good creditworthy in market then don't worry about Liquidity problem. Because whenever Liquidity problem arise then Company borrowed money Short term from Bank. And Bank is ready to Provide Loan to company. Because company have good image in market.

In today, Most of big companies use this strategy. They Payment to supplier on long credit period and provide small credit Period. (Same like this case.)

Because company use money of Supplier from own business without paying interest. In this case if company pays its account payable within 30 days, then company required to borrow fund from bank and required to pay interest therein. In simple words, Negative operating cycle means company is using money more efficiently.