Role in the cash conversion cycle accounts payable

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: s presented from the viewpoint of the purchaser. Role in the Cash Conversion Cycle accounts payable management Management by the firm of the time that elapses between its purchase of raw materials and its mailing payment to the supplier. EXAMPLE The average payment period is the final component of the cash conversion cycle introduced in Chapter 14. The average payment period has two parts: (1) the time from the purchase of raw materials until the firm mails the payment and (2) payment float time (the time it takes after the firm mails its payment until the supplier has withdrawn spendable funds from the firm’s account). In the preceding chapter, we discussed issues related to payment float time. Here we discuss the management by the firm of the time that elapses between its purchase of raw materials and its mailing payment to the supplier. This activity is accounts payable management. The firm’s goal is to pay as slowly as possible without damaging its credit rating. This means that accounts should be paid on the last day possible, given the supplier’s stated credit terms. For example, if the terms are net 30, then the account should be paid 30 days from the beginning of the credit period, which is typically either the date of invoice or the end of the month (EOM) in which the purchase was made. This allows for the maximum use of an interest-free loan from the supplier and will not damage the firm’s credit rating (because the account is paid within the stated credit terms). In the demonstration of the cash conversion cycle in Chapter 14 (see pages 601–602), MAX Company had an average payment period of 35 days (consisting of 30 days until payment was mailed and 5 days of payment float), CHAPTER 15 Current Liabilities Management 637 which resulted in average accounts payable of $473,958. Thus the daily accounts payable generated by MAX was $13,542 ($473,958/35). If MAX were to mail its payments in 35 days instead of 30, its accounts payable would increase by $67,710 ($13,542 5). As a result, MAX’s cash conversion cycle would decrease by 5 days, and the...
View Full Document

This document was uploaded on 01/19/2014.

Ask a homework question - tutors are online