5.1Introduction to Short-Term Financial Management
K: Nike makes athletic shoes and other sportswear. Nike manufactures these items and then sells them to retail outlets, typically on credit. – I know that you are an expert in these matters, so, very roughly speaking, how many days elapse from the time that Nike buys raw materials until the time that Nike sells the finished shoes and sportswear?
J: About 80 days. We call that the “number of days’ sales in inventory.”
K: OK. So, how long until Nike collects the cash from these sales to retail outlets?
J: On average, about 50 days. We call that the “average collection period.” If you take those two numbers together --- 80 days from the purchase of the raw materials to the sale of the finished shoes and sportswear and 50 days from the sale to the cash collection --- you get 130 days which is the length of Nike’s operating cycle.
K: Operating cycle?
J: Yes. The time from the purchase of the raw materials to the collection of the cash from the sale of finished goods. For Nike, 130 days.
K: Alright. Now, I assume that Nike purchases its raw materials on standard credit terms from its suppliers. How long can Nike wait until it has to pay for these materials purchases?
J: On average, Nike pays in about 40 days.
K: So, Nike buys raw materials on credit and then pays for those raw materials after about 40 days. But Nike doesn’t collect the cash from selling the finished shoes and sportswear until a total of 130 days have elapsed.
J: Exactly. This is why companies such as Nike must carefully manage purchases, sales, and cash collections in order to balance out this mismatch between the timing of cash payments and cash collections.
K: What about McDonald’s?
J: I LOVE the cash flow pattern of McDonald’s. From the time that McDonald’s buys raw materials (food and packaging) until McDonald’s sells the finished product (the food wrapped in the packaging), about 7 days elapse. Cash collection takes about 2 seconds because even when the customer uses a credit or debit card, McDonald’s gets its electronic cash almost instantly. So, the length of McDonald’s operating cycle is 7 days plus 2 seconds … 7 days from the purchase of the raw materials until the sale and then 2 more seconds to collect the cash.
K: That is RAPID asset management. Let’s talk about Short-term Financial Management.