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i'm really confused by this ratio. Basically it rewards companies for allowing their accounts payables to exceed their scheduled payment dates. if you have a company that has no short term debt then it is pretty hard to get a flowie below 1.25. i,m not sure i agree that a company is managing its cash correctly by allowing payables to be paid out slowly. as the owner of a private company, my survival depends on my vendors and their willingness to ship raw materials to me depends greatly on my on time payments. one of the reasons a lot of companies don't want to sell to walmart is that they dictate when they are going to pay which is usually 120 days plus. now the fool claims that walmart is an industry leader for being able to do this and is managing their cash correctly, but i don't agree. hopefully, you can explain this reasoning to me or is there something i am not understanding? thank you
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i'm really confused by this ratio. Basically it rewards companies for allowing their accounts payables to exceed their scheduled payment dates.

Not necessarily true. A company with a lot of juice with its supplier can negotiate a ridiculously generous financing deal.

One of the reasons a lot of companies don't want to sell to walmart is that they dictate when they are going to pay which is usually 120 days plus. now the fool claims that walmart is an industry leader for being able to do this and is managing their cash correctly, but i don't agree. hopefully, you can explain this reasoning to me or is there something i am not understanding? thank you


I think it's mostly because your experience is from the wrong side of the table. From Walmart's (and their shareholder's) point of view, they have enough purchasing power that they can dictate this kind of payment schedule and get their suppliers to fall in line. The reason they fall in line is because they can't affort to lose Walmart as a customer.

There are other ways to lower a Flowie, the Flowie is a function of the industry more than the individual company. Inventoryless industries obviously get an edge in their Flowie. Having significant amounts of deferred revenue is one of the most common reasons I've seen for a low (< 1.00) Flowie.

Marv
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you're right. i am on the wrong side of the table. it still amazes me that when you sell goods or services to companies like walmart, they tell you what their terms of payment are. doing business with the likes of walmart sounds great at first but after they have reduced your profit margin to near zero and have held off payments for 3-4 months, you will find that the "bloom is off the rose" in a real hurry.
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