F1 - Cashflow Cycles & Analysis CH1 Operating Cashflow Cycle

Operating Cashflow Cycle questions

Why is cash flow critical to business health?

Cash funds operations, payroll, taxes, capex and debt servicing — without it a profitable firm can fail.

What’s the difference between short-term and long-term cash flows?

Short-term = operating cash flows (working capital). Long-term = investing cash flows (capex/non-current assets).

Define Total Working Capital.

Current Assets − Current Liabilities.

Name the three main accounts that form Operating Capital.

Accounts receivable, Inventory, Accounts payable.

What is inventory?

Raw materials, work-in-progress, and finished goods held to sell or use in production.

What does Inventory Turnover measure?

How many times inventory is sold and replaced in a period (COGS ÷ average inventory).

Why can too much inventory be bad?

Raises holding costs, risk of obsolescence, and ties up cash.

What is accounts receivable (AR)?

Sales made on credit — amounts owed by customers.

How does slow collection of AR affect cash?

Delays cash inflows and increases the funding gap; can force borrowing or cutbacks.

What are common ways to improve receivables collection?

Invoice promptly, enforce 30-day terms, offer discounts for early payment, require deposits, follow up overdue accounts.

What is accounts payable (AP)?

Amounts the company owes suppliers for purchases on credit.

How can firms optimize AP without harming supplier relations?

Negotiate longer terms, use vendor financing, time payments, use credit cards tactically.

List the steps of the Working Capital Cycle.

Purchase inputs → Pay AP → Produce → Sell → Collect AR → Net cash change → Repeat.

What are the three levers to shorten the working capital cycle?

Delay AP, turn inventory faster, collect AR faster.

Write the formula for Receivables Days.

(Receivables ÷ Revenue) × 365.

Write the formula for Inventory Days.

(Inventories ÷ COGS) × 365.

Write the formula for Payable Days.

(Payables ÷ COGS) × 365.

How is the Funding Gap (in days) calculated?

Receivable days + Inventory days − Payable days.

How is the Operating Line Required (financing) calculated?

(Funding Gap × COGS) ÷ 365.

If a bank will lend up to X% of receivables/inventory, how do you estimate the operating line allowed?

Allowed = X% × Receivables + X% × Inventories (apply bank’s advance rates).

Give one structural bank arrangement to optimise cash pooling.

Sweep accounts that automatically consolidate surplus balances into a central operating account.

What’s a “just-in-time” (JIT) inventory strategy?

Minimising on-hand inventory by receiving inputs only as needed to reduce holding costs.

Name two inventory buying strategies to avoid stale stock.

Smaller, more frequent orders; demand forecasting and SKU rationalisation.

How can a credit card tactically improve the working capital cycle?

Pay suppliers with a card to extend payment timing if card terms exceed supplier terms.

Why centralise customer/supplier data?

To automate invoicing, standardise terms and speed collections/payments.

What are the two main objectives of working capital management?

Streamline efficiency (processes) and optimise liquidity (cash availability).

Give one automation that improves working capital efficiency.

Electronic invoicing and automated receivable reminders.

How should companies match short-term assets and liabilities?

Align maturity of short-term assets with liabilities; invest surplus cash in short-term deposits matched to needs.

What is the operating cashflow “lifeblood” metric lenders check?

Net cash provided by operating activities.

How does improving working capital free cash for growth?

Reducing the funding gap releases cash previously locked in AR/inventory, lowering borrowing needs.