I need a bit of your suggestion. Have a look at the Working Capital Funding Gap for a company over a 5 year span; starts from negative and becomes more negative later on. It has performed bad considering Inventory and Receivables turnover ratios but the Payable turnover ratio is significantly higher than both of the other two combined. We know ideally that lower the gap, the better it is, but I cannot come to a conclusion for a negative dip in the gap for this example. Any suggestions?
Based on just the information given, the company is a cash generating machine!
Negative funding gap means after selling good and receiving cash from customers, there is still 28+ days before the company pays its suppliers. The cash can be invested in the interim to earn interest income. The company will never have to worry about requiring cash to fund receivables.
What I can see is that the company:
- has a strict collection policy (this may have an adverse impact on future revenue if competitors give longer credit terms)
- is able to get a long credit term from suppliers (more than 50 days); probably a big company with huge order that is able to negotiate payment terms; or it can be that the company just likes to drag payment (but that can affect relationship with supplier in the future with shorter payment terms).
Thank you for such constructive feedback! Esp on the negative metric’s assessment.
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