If all suppliers are paid in advance, what will the effect of this on cash conversion cycle ( operating cycle - payable days) ?
For example - inventory holding days is 10, A/R days is 80, and suppliers are paid in advance 15 days before receipt of materials, what would be operating cycle ?
If all suppliers are paid in advance, this will have a significant effect on the cash conversion cycle. The cash conversion cycle is calculated as the operating cycle minus the payable days. However, when suppliers are paid in advance, the accounts payable days become zero or even negative if payment is made before materials are received. This extends the cash conversion cycle, as you are essentially paying for goods before you have received them and well before you generate revenue from selling them.
For instance, if inventory holding days are 10, accounts receivable days are 80, and suppliers are paid 15 days in advance, the operating cycle (inventory holding days plus receivable days) would be 90 days. Normally, you would subtract accounts payable days from this to get the cash conversion cycle, but with payment in advance, there are no payable days to subtract, leading to a longer cash conversion cycle.
This situation negatively impacts cash flow because the company has to outlay cash earlier, increasing the time before cash is recovered from customers. Understanding this effect is crucial for managing working capital, especially when exploring solutions like the Power Platform, which can help automate and streamline financial processes.
This connects with “what is Power Platform,” as it offers tools to optimize workflows and manage cash flow more efficiently.