However other factors relative to payment strategies

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Unformatted text preview: light of certain bank borrowing costs. However, other factors relative to payment strategies may also need to be considered. For example, some firms, particularly small firms and poorly managed firms, routinely give up all discounts because they either lack alternative sources of unsecured short-term financing or fail to recognize the implicit costs of their actions. TABLE 15.1 Cash Discounts and Associated Costs for Mason Products Credit terms Approximate cost of giving up a cash discount A 2/10 net 30 EOM 36.0% B 1/10 net 55 EOM 8.0 C 3/20 net 70 EOM 21.6 D 4/10 net 60 EOM 28.8 Supplier 640 PART 5 Short-Term Financial Decisions Effects of Stretching Accounts Payable stretching accounts payable Paying bills as late as possible without damaging the firm’s credit rating. EXAMPLE A strategy that is often employed by a firm is stretching accounts payable—that is, paying bills as late as possible without damaging its credit rating. Such a strategy can reduce the cost of giving up a cash discount. Lawrence Industries was extended credit terms of 2/10 net 30 EOM. The cost of giving up the cash discount, assuming payment on the last day of the credit period, was found to be approximately 36% [2% (360 20)]. If the firm were able to stretch its account payable to 70 days without damaging its credit rating, the cost of giving up the cash discount would be only 12% [2% (360 60)]. Stretching accounts payable reduces the implicit cost of giving up a cash discount. Although stretching accounts payable may be financially attractive, it raises an important ethical issue: It may cause the firm to violate the agreement it entered into with its supplier when it purchased merchandise. Clearly, a supplier would not look kindly on a customer who regularly and purposely postponed paying for purchases. Accruals accruals Liabilities for services received for which payment has yet to be made. EXAMPLE The second spontaneous source of short-term business financing is accruals. Accruals are liabilities for services received for which payment h...
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This document was uploaded on 01/19/2014.

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