- 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 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 the sportswear?
- [Jim] Well, turns out that's about 80 days.
We call that number, number of days sales in inventory.
- [Earl] Okay, so how long until Nike collects the cash
from the sales to these retail outlets?
- 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 goods in sportswear,
and 50 days from the sale to the cash collection,
you get 130 days which is length of Nike's operating cycle.
- Operating cycle?
- Yeah, that's 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.
- All right, now I assume that Nike purchases
its raw materials on standard credit terms
from its supplier.
So how long can Nike wait until
it has to pay for those materials?
- On average, Nike waits about 40 days.
- Okay, so Nike buys raw materials on credit
and then pays for those raw materials
after about 40 days, you said?
But Nike doesn't collect the cash
from selling the finished shoes and sportswear
until a total of 130 days have elapsed.
- [Jim] That's exactly right.
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 the collection of the cash.
- All right, so what about my favorite company, McDonald's?
- Ah, I love the cashflow pattern of McDonald's.
From the time that McDonald's buys raw materials,
that's food and packaging,
until McDonald's sells the finished product,
the food wrapped in the packaging,
about seven days elapse.
Cash collections takes about two 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 seven days plus two seconds.
Seven days from the purchase of
the raw materials until the sale,
and then two more seconds to collect the cash.
- Now that is rapid asset management.
Let's talk about short-term financial management.