Final answer:
A stable inventory turnover combined with a decreasing receivables turnover and an increasing payables turnover suggests the firm's operating cycle may be lengthening due to slower collections, while the cash cycle is also likely to be extended. The firm may experience some offset by delaying payments to suppliers, but should actively manage these cycles to maintain healthy cash flow for reinvesting and growth.
Step-by-step explanation:
If we observe that a firm's inventory turnover is constant but its receivables turnover is decreasing, it suggests that the company is taking longer to collect payment from its customers. On the other hand, an increasing payables turnover indicates that the firm is taking longer to pay its suppliers. When we consider these movements together, there are implications for the firm's operating cycle and cash cycle. The operating cycle might not show significant change because the inventory turnover is stable; however, the increasing receivables turnover period indicates that the operating cycle could be elongating because of slower collections.
The cash cycle is likely to be lengthened due to slower collections on receivables despite inventory moving at the same rate. However, the extended payables turnover could provide the firm with a source of short-term financing by delaying cash outflows, offering some degree of offset to the longer cash cycle created by slower collections. It's important for a firm to manage these cycles effectively to maintain liquidity and operational efficiency, crucial for long-term sustainability and growth. This management can be supported by strategies such as reinvesting in efficient technologies and processes that can streamline operations and potentially improve cash flows.