Which of the following is considered a good cash management practice when making inventory purchases?

• A. Taking advantage of supplier discounts for early payment
• B. Purchasing inventory in large quantities regardless of demand
• C. Delaying payments to suppliers beyond agreed terms
• D. Maintaining excessive inventory levels to avoid stockouts

Answer: (A)

Verified step by step guidance

1. Understand the concept of cash management: Cash management involves efficiently handling a company's cash inflows and outflows to ensure liquidity and minimize costs. Good practices aim to optimize cash usage while maintaining strong supplier relationships.
2. Analyze the options provided: Evaluate each option to determine whether it aligns with good cash management practices. Consider factors such as cost savings, supplier relationships, and inventory efficiency.
3. Option 1: Taking advantage of supplier discounts for early payment. This is a good cash management practice because it reduces the cost of inventory purchases and strengthens supplier relationships by adhering to payment terms.
4. Option 2: Purchasing inventory in large quantities regardless of demand. This is not a good practice as it can lead to excessive inventory holding costs and cash being tied up in unsold goods, reducing liquidity.
5. Option 3 and 4: Delaying payments beyond agreed terms and maintaining excessive inventory levels. Both practices can harm supplier relationships and lead to inefficiencies, making them poor cash management strategies.