Final answer:
Increasing inventory turnover allows a firm to reduce its borrowing needs because it sells its inventory more quickly, thus not relying heavily on external financing. Option A is correct as higher inventory turnover results in less capital tied up in unsold goods and less need for loans or high cash balances.
Step-by-step explanation:
Firms that successfully increase their rates of inventory turnover are essentially selling their inventory more quickly. This can lead to several financial benefits for the company. A quicker turnover of inventory implies that the company has a more efficient operations process and that its goods are in higher demand. When a firm has a higher inventory turnover, it means the company is selling its goods rapidly and doesn't need to store as much inventory at any given time. Consequently, this can lead to lower storage costs and less capital tied up in unsold goods.
One of the direct outcomes of this increased efficiency is a reduction in borrowing needs. Since the company is selling its inventory more quickly, it generates revenue faster and thus does not need to rely as heavily on external financing for its operations or to maintain high levels of inventory. This translates into a reduced need for loans or lines of credit, which can be costly due to the interest payments. Furthermore, because the firm is generating cash more quickly from its sales, it also has less need for high cash balances to cover operational costs. Therefore, the answer to the question is Option A: be able to reduce their borrowing needs.
Increasing inventory turnover does not necessarily mean that a company will reduce dividend payments to stockholders (Option B), as dividends are typically based on profitability and the strategic decisions of the board of directors. It also does not make it more difficult for a firm to be given credit by suppliers (Option C); in fact, suppliers may be more willing to extend credit to a firm that turns over inventory quickly and reliably. Finally, a need for higher cash balances (Option D) is unlikely if cash is revolving faster due to quicker product sales.