OR 3150 class notes - class notes

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ORIE 3150 September 16, 2010 I. Cash Cycle Review A/P Average Sold Goods of Cost Turnover Payables Inventory Average Sold Goods of Cost Turnover Inventory Receivables Turnover A/R Average Sales Net Turnover 365 (days) Age Cash Used = 365 u n CGS Cash Supplied = 365 f n Sales The cash cycle occurs as follows. 1. A merchandiser purchases inventory from a supplier on account, thus the merchandiser incurs an accounts payable at that time. 2. This inventory sits on the shelf in the store for a certain number of days. 3. Then a customer purchases the inventory on account, thus it becomes an account receivable. 4. The merchandiser pays off the accounts payable using cash at some point, this may be before or after he/she receives cash from the customer. If the merchandiser receives cash from before he/she must pay cash to the supplier, the merchandiser can invest this money, use it to build a new store (like Carrefour did), or otherwise use the money for other things. The cash cycle in this case provides cash to the business. This is a favorable cash cycle, and the number of days between receiving the cash from customers and paying it to the supplier is defined as n f . If, conversely, the merchandiser must pay the supplier before he/she receives cash from the customer, the merchandiser must get the cash from some other source. The most common source of cash for this purpose is short term borrowing from a bank.
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