Question

- If firm reduces its inventory without adversely affecting sales, what effect will this have on the cash position?

- If firm reduces its DSO without adversely affecting sales, how would this affect its cash position?

Answer 1

1)

If firm reduces its inventory without adversely affecting sales:

Short run: Cash will increase as purchase of inventory reduces.

Long run: Company is likely to take steps to reduce its cash holdings if no need of cash.

2)

If firm reduces its DSO without adversely affecting sales

Short run: If customers pay sooner, this increases cash holdings.

Long run: Over time, the company would hopefully invest the cash in more productive assets, or pay it out to shareholders.