Sample Essay

The cash flow cycle is relatively shorter and faster in retailing companies as compared to manufacturing companies due to the fact that retailing companies do not manufacture any products, they just purchase finished goods and sell them to end users. The cash is tied up in the production process of manufacturing companies. This means that if a company can speed up its sales and limit the number of days items remain in inventory it can speed up its cash flows. A study carried out on listed companies of the Istanbul Stock Exchange indicated this variation between the cash collection cycles of manufacturing and retailing companies. The retailing companies need to sell the items in inventory in order to convert the inventory into cash. The number of days inventory remains in the company determines the speed of cash flows. If these items remain in inventory for a longer period of time cash inflows will be slower. Applying this same rule companies sell of the older items of the inventory through clearance sales, discount coupons and other promotional campaigns (Uyar 2009).
Companies can also speed up cash inflows and delay cash outflows through credit terms with customers and suppliers. The credit term usually has two parts; the first is the total number of days allowed for credit and the second part which is optional identifies if any cash discount is available in case a payment is made before the due date. A company can make arrangements with suppliers to prolong credit period and give cash discounts to customers to motivate early recovery of cash. The credit terms in most industries is usually 30 days but can vary with variations in the economy and industry. If an industry is highly competitive the credit period can go up to 60 or 90 days. If the customers are to be motivated to pay cash earlier, the cash discount offered on early payment would have to be higher than interest rate on short term investments and deposits (Coyle 2000).

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