- Nike makes athletic shoes and other sportswear. Nike manufactures these items and then sells them to retail outlets, typically on credit. Now I know that you are expert in these matters. So, roughly speaking, how many days elapse from the time that Nike buys the raw materials until the time that Nike sells these finished goods and sportswear? - That's about 80 days, we call that the number of days sales and inventory. - OK, so how long until Nike actually collects the cash from these retail outlets? - On average that's about 50 days, we call that the average collection period.
If you take those two numbers together, 80 days from the purchase of raw materials to the sales of the finished goods and 50 days from the sale to the cash collection you get 130 days, which is the length of Nike's operating cycle. - Operating cycle? - Yeah, the time from the purchase of the raw materials to the collection of the cash from the sale of the finished goods. For Nike, 130 days. - So 130 days, all right. Now, I assume that Nike purchases the raw materials on standard credit terms from its suppliers? So how long can Nike wait until it pays for those raw materials? - On average, Nike pays in about 40 days.
- Now wait, so Nike buys the raw materials on credit and then pays for those raw materials after 40 days. But Nike doesn't collect the cash from selling the finished shoes and sportswear until a total of 130 days have elapsed? - That's exactly right. That's 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 the cash collections. - So that's Nike. What about McDonalds? - Ah, I love the cash flow patterns at McDonalds. From the time that McDonalds buys raw materials, that's food and packaging, until McDonalds sells the finished product, the food wrapped in the packaging, that's about seven days.
Cash collection takes about two seconds, because even when the customer uses a credit or a debit card McDonalds gets its electronic cash almost instantly. So the length of McDonalds operating cycle is seven days plus two seconds. Seven days from the purchase of the raw material until the sale and then two more seconds to collect the cash. - That is rapid asset management! Let's talk about short term financial management.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans