Question
In: Finance
A finance manager said: “If a firm has any excess cash, it should pay its suppliers...
A finance manager said:
“If a firm has any excess cash, it should pay its suppliers more quickly.”
Discuss the extent to which you agree with this statement.
Solutions
Expert Solution
If the firm has any excess cash, it will mean that the company is having a very high amount of liquidity in its hands but the company is not able to utilise that cash for maximization of its value because it is not having optimum opportunities in order to reinvest in order to maximize its overall value so it is having idle cash in its own hands and it is representative of loss of opportunity.
The company should be trying to pay the creditors early in order to have a better amount of credit worthiness and better credit condition because if the company is not utilising the cash in an optimum manner, then there should be some benefits associated with it and it can be related to payment to the creditors early which will be leading to discount on the payment terms in next purchasing cycle so it can have a reduction of overall costs related to the company and it will be improving its overall profits.
it is having a sound cash conversion cycle because it is holding excess cash so it should utilise the ideal cash in order to lower it's cost by payment to the creditors early.
I do agree with this statement because utilisation of the cash for payment would be leading to reduction in the overall cost.
jeff jeffy answered 2 years agoRelated Solutions
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