Q Ltd has a stock turnover of 40 days, debtors' turnover of 45 days and creditors' turnover of 47 days. How long, on average, does each GBP 1 invested in working capital stay tied up? Option: A. 38 days, B. 42 days, C. 85 days & D. 132 days. Answer is A. Please explain the answer on this. Regards Kamal
For the purposes of this answer, assume January has 100 days. 1 January: company buys (but doesn't pay cash yet for) stock. 41 January: company sells (but doesn't receive cash yet for) the stock, having spent 40 days storing it. 48 January: company finally has to pay for the stock it bought 47 days ago. 86 January: company finally receives the cash for the stock it sold 45 days ago. So the cash was tied up in working capital from 48 January (didn't have to pay anything before then) until 86 January (finally got paid, so can spend cash again), ie 38 days. It's lucky January is so long.
