If a supplier has terms of NET 30, so they let you pay for inventory 30 days from delivery, and my company is able to sell all of that inventory within 15 days of delivery, how does this affect free cash flow?

I am assuming we just shift the cash flow up 15 days?

Thanks!

Inventory is not in the calculation for free cash flow.

The more quickly you can sell, perhaps the more quickly you can bill and get your money coming back in, but if all you do is get your money back in faster, it will only affect a BALANCE one time.

This is an over-simplistic example which would never work in real life, but hopefully will make the point:

If you start selling on January 1 and sell $1000 of merchandise after 30 days, you'll have sold $12,000 worth by the end of the year. If you give your customers 30 days to pay (which will not affect how much time you have to pay), then you will have been paid $11,000 by the end of the year. The Dec sales will not have been collected yet.

The next year you do the same thing. You sell $1000 each month and the customers have 30 days to pay. But in the second year you will collect $12,000. You won't have collected December, but you'll have collected from the prior December. In other words, that delay only affected the first year.

If you sell it 15 days sooner, by the end of the year, you'll have $500 more, a half month worth. But it will only affect the first year. Yes, that will affect your operating cash flows that first year. How much it will affect it as a percent will depend on what else goes on with your cash, but it will only affect it the first year.

You also have to keep in mind when you say "shift the cash flow up" -- shift it up from what?? There's only a shift in cash flow if you make a change from whatever you used to do. Notice my example is changing from 30 days to 15 days. If you've always sold in 15 days, it doesn't "shift" anything, and it doesn't change what your operating cash flows would already have been.

Somehow this reminds me of a boss I once had, who made a certain deal with a customer to get a payment from them one week sooner. This entailed forking out quite a bit of money to accommodate this. He thought we were getting money early every week and that it was worth this expenditure.

He never understood why we only got extra money that one week, and from that point on, nothing was any different than if we had made no change... we still got one week of payment each week, just like always. And that one extra week was certainly never worth the expenditure.

Thanks! What I meant by cash flow shifting up, was that if we typically assume NET 30 terms, most customers pay right around 30 days (or later) but if we assume 30 days for us to get paid, but we actually get paid 15 days early, it's sort of like "float" right?

And I'm being thrust into this, without any financial background, so my apologies in advance!

I'm starting to think you are confusing free cash flow with the cash conversion cycle?

The cash conversion is like how long the cash is "tied up." You buy the inventory. You have to pay for it. But you sell it. And you get paid for selling it. If you get paid sooner then that'll shorter that cycle, yes.

It's only sort of like a "float" if you get paid before you have to pay. That is, you have to sell the inventory and get paid for it, before you have to pay for the inventory. If you have to pay in 30 days, you have to get it sold and get paid in under 30 days. And that would be a negative conversion cycle.

Otherwise there is no "float" like you mean - you simply would have a shorter conversion cycle. Which of course is a good thing, but not a float.

If you want to know what some of this junk means:
Investopedia.com: Financial Ratio Tutorial (http://www.investopedia.com/university/ratios/)

Thanks. So basically since we have 30 days to pay our supplier, nad we sell all of the product in 15 days (cash), we have a positive cash flow? (at least for the 15 days we have the cash from the sales and don't pay the supplier yet)

Not necessarily. The word cash flow doesn't apply to this, because you're trying to isolate only two things that would affect cash flow. That's why we have a cash conversion cycle, because that does isolate it to just this. What you have is a negative conversion cycle.

I can see why you're thinking that way. However... you're already aware that you have the cash 15 days before having to make a payment, so you don't need to be told that. I have to therefore conclude that what you're looking for is how to "officially" term this - i.e. what does this actually mean in accounting.

And in accounting, "cash flow" refers to all cash. We can divide it up by different types of activities, but this is operations and there's more to operations than just selling inventory. If you want a real accounting explanation, I wouldn't call it that. It's a cash conversion cycle. If you want to think of it as "float" on your inventory, I suppose you could do that.