20.9 Creditors and the Cash Cycle
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The document discusses the importance of creditors in completing the cash cycle for a business. It notes that if a retail store buys stock on 60 days credit, their cash cycle should return cash within 60 days by selling stock to customers on credit and collecting that cash from debtors within the 60 day period. The cash cycle diagrams show the purchase of stock on credit, sale of that stock to customers on credit, collection of cash from debtors, and payment of cash owed to creditors, noting the number of days for each part of the cycle.
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20.9 Creditors and the Cash Cycle
- 1. 20.9 CREDITORS AND THE CASH CYCLE
- 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Cash Cycle The importance of creditors is that they complete the Cash Cycle 20.9 CREDITORS AND THE CASH CYCLE 1. Purchasing stock from suppliers on credit 2. Selling stock to customers on credit 3. Collecting the cash owing from debtors
- 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Cash Cycle If a retail store buys stock on 60 days credit, then the objective of the business should be to have its Cash Cycle return the cash within 60 days 1. Purchasing stock from suppliers on credit 2. Selling stock to customers on credit 3. Collecting the cash owing from debtors 4. Pay the cash owing to creditors = 58 days Creditors Turnover in Days = 27 days Debtors Turnover in Days = 24 days Stock Turnover in Days 20.9 CREDITORS AND THE CASH CYCLE
- 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 1. Purchasing stock from suppliers on credit 2. Selling stock to customers on credit 3. Collecting the cash owing from debtors 4. Pay the cash owing to creditors = 58 days Creditors Turnover in Days = 27 days Debtors Turnover in Days = 24 days Stock Turnover in Days Day 0 Day 58 Day 0 Day 51 1. Purchasing stock from suppliers on credit 7 days to use cash to pay creditors Buying stock Selling stock 20.9 CREDITORS AND THE CASH CYCLE
- 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Cash Cycle 1. Purchasing stock from suppliers on credit 2. Selling stock to customers on credit 3. Collecting the cash owing from debtors 4. Pay the cash owing to creditors = 45 days Creditors Turnover in Days = 32 days Debtors Turnover in Days = 26 days Stock Turnover in Days 20.9 CREDITORS AND THE CASH CYCLE
- 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 1. Purchasing stock from suppliers on credit 2. Selling stock to customers on credit 3. Collecting the cash owing from debtors 4. Pay the cash owing to creditors = 45 days Creditors Turnover in Days = 32 days Debtors Turnover in Days = 26 days Stock Turnover in Days Day 0 Day 45 Day 0 Day 58 1. Purchasing stock from suppliers on credit 13 days to find cash to pay creditors Buying stock Selling stock 20.9 CREDITORS AND THE CASH CYCLE
- 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework Ex20.11 X Ex20.12 X